How to use cash flow to make important decisions for your company’s finances?
Thus, cash flow is an ally in the control and planning of business operations. In addition, it can help optimize the company’s resources, improve its performance and lead to safer financial decisions.
Were you interested in understanding the subject? Continue reading and learn how financial cash flow can be used in your company’s decision-making process!
How important is cash flow?
The evaluation of the cash flow allows to verify the income of a company, since through it it is possible to measure and compare the results of the business. It also helps identify which resources are most effective and where the money is being spent.
Thus, tracking cash flow provides an accurate diagnosis of the financial health of your business. With this assessment, it is possible to know if the company earns more than it spends and, if so, take measures to solve the problem.
That way, cash flow generates more control over your business accounts. It also assists in cost management, as the financial manager observes if unnecessary expenses occur and can make changes to cut them, leading to better results.
The analysis of cash flow history also enables better financial planning. After all, it is possible to predict future impacts due to seasonality and make projections so that this impact is as small as possible, which offers more security to the company’s activities.
Soon, the management is able to know how the resources are being used, clarifying the conditions that make the business have more or less money available. Then it is possible to make a prediction of how this money can be invested in the best way.
What is the main information contained in it?
Now that you know how important cash flow is, you need to know the information it contains. They are linked to operating, investing and financing activities.
Operating entries refer to amounts received from sales and accounts receivable. The outputs are payroll amounts for employees and suppliers, amortization of assets, taxes not related to financing or investments, etc.
Investment activities, in turn, relate to the sale or purchase of assets, which are not part of day-to-day activities. This is the case with real estate, business equipment or real estate values. In this context, the amount spent on the purchase should be classified as an output, while the gain on the sale or rent is part of the inputs.
Financing activities are loan payments, distribution of dividends and issuance or repurchase of shares. Obtaining a loan is considered an input to the cash flow, while its payment must be recorded as an outflow.
How can cash flow help in making financial decisions?
You already know that the information provided by cash flow analysis is of great relevance to the success of a business. But how can they strategically collaborate in your company’s financial decision-making?
The knowledge generated through this analysis better prepares management and reduces the chances of making incorrect decisions. This is because, with cash flow up to date, it is easier to predict difficulties or plan investments aimed at business growth.
In addition, cash flow helps the manager to project profits and expenses. Your assessment can indicate, for example, when a period is suitable or not for an acquisition. This analysis avoids unnecessary investments and your company can have better results.
Based on the cash flow, the manager can also identify financial problems and apply corrections or cost reductions. The tool also helps you define the minimum resources your business needs to deal with eventualities.
Through this observation it is still possible to make a cash flow projection. That is, in addition to the present information, you can know what to expect and define which paths to follow in the future. The practice allows making adjustments and taking more conscious measures to keep the business sustainable.
Working this information strategically, the manager can make decisions that favor the profitability of the business. Therefore, your company’s cash flow must undergo constant updating, so that you can have correct data on finances.
How to set up my company’s cash flow?
After understanding how cash flow can help your business decisions, it remains to know how to set it up. In this sense, the first step is to recognize and list all your company’s expenses.
Then, identify what amounts you have in cash and control accounts payable and receivable from customers, in order to keep your cash flow up to date and prevent forgetfulness. Also, avoid making late payments, so as not to pay fines and interest and maintain a good reputation with suppliers.
On the other hand, it is also necessary to prevent the default of its customers. Therefore, have control of the accounts. Performing the bank reconciliation of accounts payable and receivable is essential to know if they present differences and need corrections.
All these tasks can be quite complex to do manually and alone. Therefore, it is worth resorting to technology to facilitate the work. With financial management software, for example, you automate control and make it much easier to monitor cash flow.
