Without an efficient cash flow, the entrepreneur runs serious risks of not having a clear and realistic vision of his business and making wrong decisions that will negatively affect the health of the company.
The role of business cash flow, therefore, should not be overlooked – whatever the size of your business.
What is the importance of a business cash flow?
Cash flow is an essential tool for micro, small and medium-sized companies to successfully control their finances .
After all, it is what allows the formation of a solid financial database – facilitating financial management and helping the entrepreneur to identify the main strengths and weaknesses of the business in relation to the financial flow.
Imagine, for example, that you have a small business and you have a few customers. However, you are not in the habit of keeping track of what goes in and out of the company's account.
Customer payments come in and company bills are paid, but you don't keep records of those transactions.
In this situation, how would you go about identifying whether your company is growing in a healthy way, or even planning investments for the future, such as hiring new employees?
Without cash flow, you would hardly be able to understand the current financial situation of your business, much less plan improvements for the future or make projections. And no entrepreneur would like to go through this situation, would they?
What does it take for effective cash flow?
You may be wondering: but how should I proceed to maintain an effective cash flow? The answer to this question can be summed up in just two words: financial control.
The truth is that there is no cash flow without efficient business financial control . To have it effectively, it is essential that you keep your company's finances always organized.
Recording all daily financial operations, whether purchases or sales, payments and receipts, is an essential task for any company that wants to maintain an efficient and correct cash flow.
Company scenario after having the cash flow in hand
A company that maintains a good cash flow on a day-to-day basis can only gain. After all, this tool allows not only the organization in the short term, but also the projection of the future financial flow – which is very useful for any business.
Therefore, the company's scenario after implementation is quite promising:
Increase security in the company's financial actions;
Organize the financial department;
Make corporate finance management simpler;
Bring important information for the manager's decision-making regarding the company's finances;
Establish greater financial control;
Identify financial bottlenecks;
Optimize processes;
Cut costs and make any investments;
Projection of a more realistic future.
In practice, the company becomes an environment in which all money is properly controlled every day – without exceptions, increasing the transparency and fluidity of the business .
As a result, the expectation is that the company's chances of growth and sustainability in an increasingly competitive environment will multiply.
Types of Cash Flow
Now that you've understood the importance of using cash flow in your company's day-to-day life, it's important to understand that there are several types that can be analyzed within a company.
Knowing and understanding them can help you to know the real financial situation of your business and analyze the company's financial movements more effectively.
Check out the types below and understand how each one works in practice.
projected cash flow
The projected cash flow is nothing more than the projection of values for the future of the company . It is a tool that helps to estimate the financial situation of the company in the future.
To define the projected cash flow, it is necessary to consider the company's capital inflows and outflows in a given period, projecting them for the next periods.
Operating cash flow
In this type of cash flow, it is possible to identify the flow generated by the company's revenues and expenses in a given period . It is this tool that allows identifying the results obtained in the business and the operating profit.
direct cash flow
Direct cash flow, on the other hand, is nothing more than the record of gross payments and receipts . This means that the information obtained refers to amounts without any discounts – such as taxes, for example.
This is the most common type in companies. If you opt for this modality, you must organize payments and receipts into categories, nourishing your control with financial data about the business on a daily basis.
discounted cash flow
The discounted cash flow , in turn, allows the manager to project the wealth that the company is able to produce in the future.
In this aspect, therefore, it is easier for the entrepreneur to assess the value of his business (valuation) – and that is why this type is so used in acquisition and merger processes.
Cash flow for investments
This is a very interesting type to help the manager to create strategies for the application of any excess capital – which arise in situations of positive accumulated cash balance.
This makes it easier to analyze the market's investment options and identify the best options for contributions – which can even boost the company's financial gains.
free cash flow
It aims to identify whether or not the company has the capacity to generate free cash balance in the short, medium and long term.
And in situations where the balance is free, it is easier for the entrepreneur to establish capital application strategies – whether in the creation of other strategies, investment in personnel, among others.
If the flow is negative, this tool helps the company to correct any problems that may be harming the business's finances.