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Cash is King

Cash is King

If you work in a corporate environment or else have ventured into owning a business of your own, you have most likely heard about the importance of cash flow and how detrimental it is into making or breaking a company. Simply put, cash flow is the amount of money coming in versus the sum going out. Think of it as a tank, you have water coming in and you have a few holes here and there, where it leaks out. If you can keep your cup almost full, most of the time, you are safe.

Cash inflow is key to your business and is most likely to come from customer payments, money from an investor and some investments you may have. This is particularly important because the cash inflow will serve to pay for your operating expenses such as rent, raw materials and if applicable employee salaries. Obviously positive cash flow is a healthy sign of business success which will allow you to make new investments such as hiring new employees, opening other offices and further growing your business. On the other hand, there is negative cash flow, which means that you are forking out more than you are getting in.

If you are at the start of your new business, it is the right time to think about healthy cash flow. Ideally you would make a list of the one-time expenses such as company incorporation, accounting, office furniture and any initial deposits. Following this activity you will need to estimate your monthly expected cash income. This can be done by establishing sales projections and reducing expenses such as loans. In this regard, a conservative approach in determining sales projections would be ideal, as it is better to outperform and have a better cash flow than originally anticipated.

You will also need to keep track of monthly expenses and record everything. This is essential to minimise the risk of being hit with an unexpected expense.

To optimise your cash flow, you should issue invoices promptly and organise follow-ups accordingly and efficiently. For complex long-term projects, it would be ideal to agree on payments at regular intervals.

When it comes to paying bills, check your deadlines and take advantage by building up cash to pay such expenses and negotiate extended time periods if necessary. Building a good relationship with your vendors is essential in this regard, as they will be more lenient in allowing an extension if necessary.

It would also be wise to build a cash reserve to serve as contingency money in case of unexpected expenses or payments which require immediate settlement.

For more help on accounting matters visit www.dafs.com.mt today and drop an email.  

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