For business owners and entrepreneurs, cash flow can mean different things. Because of this, there could be a lot of misunderstandings concerning cash flow, including what it means and what it is. This is what gets most businesses into problems.

Here is a list of some of the countless cash flow myths to steer clear of:

Growing Profits Result in Positive Cash Flow

It is a no-brainer: the more profit you make, the better your cash flow will be. Unfortunately, business things are rarely this straightforward. Profit and cash flow are critical financial factors in business, although they are only sometimes related.

Profit is the money left after expenses are removed from income. Cash flow, on the other hand, is the amount of money that enters and exits your organisation. It represents the amount of money you now have available.

Profit and cash flow do not necessarily correspond. 

Assume your company made more money in June than it did in May. This is fantastic news because it signifies profit growth. However, your company has a 30-day payment period, so the money from your June sales will not reach your bank for another month. 

This will become an issue when your bills arrive, and you need more cash. Your profits may have grown in this case, but you still had a negative cash flow.

A Bank Loan May Always Be Used to Bridge Cash Flow Gaps

While a bank loan can help protect your financial reserves from running out, using it as your primary funding source is not advisable. Borrowing money can be expensive for your business, especially if interest rates are high. There’s also the possibility that you will need more time to repay the loan and wind up in debt.

Cash Flow Management Isn’t Necessary for Small Businesses

Nothing could be further from the truth. If you want to be successful, you must apply good cash flow management tactics regardless of the size of your firm. 

Monthly cash flow statements and estimates will benefit start-ups and small enterprises the most. They typically have minimal funds. Thus they must exercise careful control over their cash flow because they have less of a cushion in the event of unforeseen charges.

The key to managing small business cash flow is to become more present and involved in the process. Although it may appear straightforward initially, there are numerous aspects to consider. 

High Accounts Receivable Means A Positive Cash Flow

Counting chickens before they hatch if you rely on accounts receivable to show cash flow health. You may have an extensive list of receivables, but they are only promises from your clients once they are paid in full.

The risk is being complacent and passively waiting on clients to keep their promises. You must get more involved in collecting to avoid cash flow issues. Create and implement a procedure for tracking down outstanding invoices. When sending invoice reminders, use various communication techniques.

If the payment date has passed and you are still unable to contact clients, it is time to engage the services of a debt collection agency. You can save time by submitting outstanding accounts to professionals while guaranteeing your unpaid invoices are paid.

Conclusion

Several myths and misconceptions surrounding cash flow can lead to poor financial management and detrimental consequences. By staying informed, actively managing cash flow, and implementing appropriate strategies, companies can navigate uncertain financial waters and position themselves for long-term success.

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