You might have heard the expression "cash is king". Cash is vital for any business' survival. Good cash management is crucial if the company is to thrive and grow. No matter how successful your business is or what industry it's in, if cash runs out, you will lose your ability to borrow money and your business will cease operation.
Cash is more important than profit. It is possible to be extremely profitable and still have cash shortfalls. You won't be able to pay your employees or suppliers if you don't have the cash. A business's ability to maintain a positive money flow management is essential to its survival.
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This means that the money coming into the bank account must be equal or greater than the money going out. Positive cash flow is vital for many businesses. This allows them to plan ahead and take preventative steps to ensure they don't run out of cash. Cash flow forecasting is the process of estimating cash outflows and inflows.
It allows you to identify "negative cash flows", which are situations where money is leaving your bank account faster than it is coming in. These cash flow deficits can either be corrected by increasing cash inflows or decreasing cash outflows. You also have the option of obtaining short-term financing like a loan from a bank or a credit line to cover the gap.
The process of forecasting cash flows for an organization is much easier when it's based on a spreadsheet. A good cash flow forecasting model combined with the cash management strategies will result in increased profitability and credibility for your business. It will also give you confidence that your cash needs can be met.