Do you know what Simple Cash Flow is and its significance on your business?

There are several tools that can be used in the routine of corporate financial management to obtain data and make better decisions. This is the case of the simple cash flow, for example.

Using it, it is possible to understand the organization’s financial state of affairs and understand the state of vulnerability that the business is in. Thus, the tool allows you to understand the organization’s budget in a easy and agile way.

Want to realize extra approximately the significance of knowing simple coins flow and how to use it on your agency? Keep studying and take a look at it out!

What is a easy coins flow and what’s it for?

The time period easy cash float refers back to the recording of the enterprise’s economic sources inflows and outflows. Therefore, it includes all of the enterprise’s cash movements, from bills of fixed and variable fees to receipts from clients.

Its objective is to determine the current available balance and project the company’s finances. In this way, cash flow allows:

• understand the company’s balance;
• know whether there will be or will be a lack of money in subsequent months;
• identify the need to negotiate deadlines with suppliers;
• understand the term and credit that may be offered to customers;
• understand whether there are resources for investments;
• analyze the need for financing and loans;
• calculate other important performance indicators for company management;
• among other possibilities.

In this sense, analyzing simple cash flow allows you to take preventive measures aimed at the company’s financial well-being. Consequently, this activity contributes to making decisions that can result in business growth.

How does it work?

After learning what simple cash flow is and what it is for, it is time to find out how it works. Next, learn how this indicator is composed!

Revenue

Revenue involves all amounts that the company should receive in the coming months. In this case, records are made according to the periods in which payments should be received.

This way, you can measure future balances, having a revenue reference for the following months. As a result, it becomes easier to project the payment of the company’s commitments and investment possibilities, for example.

Expenses

Expenses involve all of the company’s commitments — such as rent, water, energy, supplies, payroll and suppliers. It is worth knowing that they can be recorded as fixed and variable expenses.

The first group refers to costs that are independent of the company’s production, such as rent, some taxes and payroll. Variable expenses should include expenses that may change depending on the company’s operations, such as energy, raw materials and others.

The main purpose of these records is to ensure that all commitments are met. This prevents interruptions to services that are important to the company’s operations. Furthermore, recording accounts payable allows you to forecast expenses and carry out more consistent financial planning.

Profit

Profit is the amount left over after subtracting charges from revenue. Without it, the business becomes stagnant, as there is no capital for investments or to cover obligations such as financing and loans.

For this reason, profitability is what drives a company. In your cash flow records, you must calculate profit in order to track this indicator. From there, you can take steps to achieve the desired profitability.

What are the differences to discounted cash flow?

Once you understand how simple cash flow works, you may be curious to differentiate this indicator from discounted cash flow (DCF). DCF defines the market value of a company based on future financial movements.

The goal is to understand whether the business will be profitable — and to evaluate the return on invested capital. In this way, DCF is used in the process of buying and selling an organization or even in raising funds from investors.

Therefore, the main difference between simple cash flow and DCF is in their application and usefulness. While the former should be used on a daily basis to help with decision-making, the latter can be applied at specific moments in the business.

How important is simple cash flow for the company?

As you have seen, a simple cash flow allows you to have a broad view of your business’s finances, not only in the present, but also in the future. This way, you can have greater control over your company’s financial health, anticipating important decisions.

For a better understanding, let’s take negative cash flow as an example. If you understand that costs will be higher than income in the coming months, you can take steps to reduce expenses or obtain more cash.

For example, you can negotiate the price with suppliers or check the need for a loan, respectively. This way, you can avoid financial difficulties and debt.

The opposite also happens. When you calculate your cash flow and realize that there is a profit, you can take advantage of investment opportunities in the company.

For these reasons, it is essential to constantly calculate cash flow in order to monitor and control the business’s finances. This way, the business can achieve healthier growth.

How to make an efficient cash flow in your business?

After understanding the importance of simple cash flow for your business, you may want to know how to apply this tool.Simply use the following formula:

simple cash flow = income – expenses

Furthermore, for cash flow to be efficient, it is important to follow some steps, such as:

• have daily organization to record all financial transactions;
• record all transaction information, such as amount, term and payment method;
• keep data up to date;
• establish frequency for simple cash flow analysis;

In this content, you understood what simple cash flow is and how to apply it to the financial management of your business. Now, you have relevant tips for using this tool in your company and promoting the financial health of the enterprise.