Why you need to start worrying about cash flow, not profits

[jrineakter]

At the end of a month or a year, a company may have a positive accounting result – that is, it may make a profit. But if its cash flow is negative, it means that, regardless of the accounting profit, it does not have the liquidity to meet its payments, which could lead to it having to close.
In this post we explain why it is essential for any company to calculate cash flow and why as a business owner you should be more concerned about this indicator than about your company's accounting result at the end of the month or year.





In addition to detecting liquidity problems, calculating cash flow has other advantages. We explain the 5 fundamental reasons that demonstrate the usefulness of this indicator, and which are sufficient reasons why your company should also calculate and project its cash flow:

To detect liquidity problems before they happen
As we mentioned, and although there can always be unforeseen events that are practically impossible to anticipate, there are many other collections and payments that are india number data recurring and that allow you to adjust your cash flow projection quite well for several months in advance. This will help you detect in advance if you are going to have liquidity problems. If, for example, at a certain time, when projecting the cash flow, you know that next month a client is not going to be able to pay you, and you are also going to have to face an extra payment, you can try to negotiate with one of your suppliers the delay of some payment that you have planned, to avoid your cash flow being negative.




To find out if you have a mismatch between collections and payments

Closely related to the previous point, calculating your cash flow helps you know if you have a mismatch between your collections and your payments. If you are charging your clients in 30 days but paying your suppliers in cash, it is very likely that your cash flow will always be negative. If you do not solve this temporal mismatch between collections and payments, you will always have liquidity problems. Try to renegotiate the conditions with both clients and suppliers. The ideal is to collect as soon as possible and pay as late as possible.


To find out if you need financing
If, despite having your collection and payment terms well adjusted, your cash flow always comes out negative when you calculate it, it means that the amount of your payments is greater than your collections. In other words, you need financing. In this case, it is important to investigate whether the negative cash flow is due to the fact that your company is growing and must face a series of investments to increase production and meet demand, or if, on the contrary, you are spending unnecessarily and uncontrollably. In this second case, it would be advisable to carry out an expenditure audit to bring them under control.