Cash is said to be the backbone of every organization. Every section in an organization runs only with the help of funds. A person is said to be a good businessman only when he becomes an expert in managing his fund or cash flow. If you don’t give much importance to the cash flow in and out of the organization will result in huge losses. To overcome this, the organizations will keep complete details regarding the cash flow mainly in spreadsheets or by using some applications. Keeping proper cash flow records will help you to file income or sales taxes easily.
What is Cash Flow?
The cash flow chart or statement gives the exact details of the cash flow of your company. The recorded data regarding the previous years’ cash flow helps the organizer to plan his feature investment wisely. There are two main types of cash flow:
- Cash Inflow: The cash inflow of a company means the revenue or the income that a company receives during its business period like receipts from buyers, the sale of fixed assets, etc.
- Cash Outflow: The cash outflow means the total expenditure of the company during a financial year like payment of interest on loans, salaries for employees, etc.
The benefit of having Cash Flows
The cash flow statements are a bunch of data that help an organizer to run his business smoothly. The main benefits of this cash flow are listed below:
- Pay Your Expenses: It is the most prominent feature of Cash Flow Statements. This statement holds all pieces of information regarding the company’s expenditure. An accountant or a management staff can examine these records to identify the total expenses of the organization and plan his business accordingly. Usually, they use to calculate these expenses types yearly, and in some organizations, they use to calculate these expenses quarterly or monthly for better financial management.
- Determining Liquidity and Profitability Positions of an organization: The cash Flow Statement helps to determine the liquidity and profitability position of the company by monitoring the profit and loss statements. Liquidity means the ability of an organization to settle the debt as soon as it becomes due. The cash flow statement exhibits the current cash position of the company and gives the instruction or remainders about the liquidity. The Cash flow statement helps us to identify the cash deficit before the payments get due so we can raise the required funds through some external sources like loans etc.
- Cash Management: Cash management is the principal factor that determines a company’s future, whether it’s a profit or loss. The organizers can give close monitoring to the company’s cash inflow, and outflow helps to expand your business.
- Expand Your Business: The well-organized cash flow statement of an organization provides you with the ratio between its income and expenditure. By evaluating this difference, we can identify the current economic and financial position of the company. After analyzing these records or statements, we can make a suitable decision to establish our company by investing more money in some other field or can purchase more shares from the current establishments. Hence our business expands to the next level.
- Optimum Cash Balance: The cash flow statement holds adequate data regarding the income and expenditure of the company. By analyzing these statements, we can identify the optimum cash balance in the company account. The early determination of this cash balance by using a cash flow statement helps you to determine whether the financial condition of the organization is in a stable, excess, or shortage state. We can get the exact amount of surplus cash in our account, or else we can borrow funds from bank sources to meet the cash deficit.
- Budgeting Decisions: Annual or quarterly budgets are an essential part of an organization. The farseeing annual budgets prepared by using the cash flow statements help in the development of an organization. We can allocate an exact amount of money for the future.
- Tax Payments: We should have the exact details regarding the income and expenditure of the company to submit the income tax returns. The well-organized cash flow chart will reduce the workload of your auditor, and the report gets submitted to the government for the further procedure of tax payment.
- Get a Business Loan: Most entrepreneurs depend on some banks or such financial institutions for their business activities. In case of any cash deficit, they approach banks for short term or long term loans to overcome the situations. Before passing these short term or long term loans, the bank will study the financial condition as well as the ability of the organization to repay this amount. To prove the ability of the organization to repay the amount, they use the cash flow statement as proof because it holds the complete details regarding cash inflow and cash outflow of the organization.
- Planning and Coordination: Planning is the backbone of every successful organization around the world. Lack of planning may lead to some disasters like a failure in the market competitions, faults in distributions, etc. The cash flow statement helps a lot in planning and coordination. By knowing the flow of cash in an organization, the management team can plan and invest accordingly to make a maximum available profit from the current business. Proper planning by using this cash flow statement will also help the organizer to prepare the financial budgets for the upcoming years.
- Performance Appraisal: The performance of an organization is by calculating the ratio between the actual cash flow statement of the organization with the projected Cash Flow Statements. If the management found a favorable relationship between the actual and the projected cash flow, they can appraise the performances regarding cash. If they identify the negative variations in the chart, and they rectify the problem accordingly for a better result in the future.