Understanding Cash Flow Balance

Understanding cash flow and cash flow balance is very important to run a successful business. A negative cash flow can adversely hurt your business irrespective of a good product, reputed brand name and a competent staff. Cash flow can be defined as the amount of cash received and spent within a business. Measurement of cash flow is done to evaluate the performance of the business, it can also be used to calculate the liquidity of the business, it can also be helpful in determining the rate of return of your business. Cash flow has two basic components that are cash inflow a business receives from sales and services and cash outflow that a business has to pay to suppliers and in the form of other expenses.

However calculating cash flow is not as easy as it may sound because of the element of credit in the business. In many cases products and goods are sold on credit and raw materials are purchased from the client on credit. Moreover a business has to pay wages to the labor and meet other expenses such as marketing, advertisements and utility bills etc. in order to keep the business operating sales may be made on credit to close the sales account.

The time lag between the debts paid by the creditors must be met by the cash flow. Maintaining this balance is called cash flow balance. If the buyers purchase products on credit and do not pay debt on time it will result in creation of bad debt that upset the cash balance and results in increased costs of the business. If cash balance increases against the operating expense of the business it will proves to be expensive for the business in form of interest payable.

Other Related Accounting Articles:

• What is Operating Cash Flow?
• Understanding Cash Flow Statement-Format and Sections
• Definition and explanation of cash flow statement
• Cash Flow Statement Example – Direct and Indirect Method
• Cash Flow Statement
• Cash Flow Statement Definition