what is cash flow

Cash flow is the lifeblood of any business—the cash that goes in and out of your company determines your financial position. In particular, managing how your cash flows in and out of your bank account depends on how you balance the timing of your cash collections from clients with cash payments to your suppliers.

Slow collection of receivables at a time when you need to pay your suppliers could give you unnecessary financial stress. You may need to borrow to bridge your working capital needs or you risk getting a credit downgrade from your suppliers. [See seven reasons to practice sales forecasting here]

On the other hand, if you collect efficiently but pay your suppliers too soon, you might incur significant opportunity costs.

Managing your cash means you need to collect cash from your customers as soon as possible while paying your suppliers as slow as possible.

Measuring Cash Flow

To manage your cash, you need to project your cash flows over a period of time— weekly, monthly, quarterly or annually—to serve as your guide.

Start your cash flow projection with the beginning cash balance for the month—use your latest bank balance from the previous month. How much of your accounts receivable do you expect to collect during the period? Do your customers pay by installments?

If so, how are the payments scheduled over the following weeks? How much of the sales are on cash basis? Do you require customers to pay down payments? If so, you also need to project your sales growth over the period to determine your cash collections. [See five easy steps to save money here]

After projecting cash receipts (or the cash fl owing in), you will need to project your cash disbursements (cash flowing out). You can divide your cash outlays into non- discretionary and discretionary cash outlays.

Non-discretionary cash outlays are those that you are bound to spend during the period. These expenditures are salaries and wages, utilities, rentals and other operating expenses. You can also include here the schedule of payments to suppliers and amortizations to banks.

The discretionary cash outlays are those that you plan to spend tentatively. Among discretionary outlays are office renovation, acquisition of new office equipment or hiring of additional staff.

YOUR 5 HABITS TO CREATING WEALTH

1. STAY FOCUSED: On a daily basis, remind yourself why you are choosing to become wealthy. What is your “big why”? Why are you choosing to save and not spend? Then stay focused. Make an effort to always remind yourself your personal purpose for choosing to become wealthy

2. PROTECT YOUR CASH: Always be aware where your money goes. Train your mind to always be conscious on your spending habits. Protect your money at all times. Once any amount enters your pocket or wallet, guard it with your life.

3. CHOOSE YOUR FRIENDS: Associate yourself with like-minded individuals. Stay away from people who give you negative influences.

4. EDUCATE YOURSELF DAILY: Learn all about your finances - how investing and financial markets operate, and how to get involved. Information is key!

5. SPEND WISELY. After satisfying your basic needs, STOP BUYING stuff that lose value. Practice self-control and discipline when it comes to spending.

Muster these, readers and be on your way to becoming wealthy.