Cash flow systems monitor and ensure adequate cash flow for a business. Managing cash flow is crucial for paying bills, payroll, and suppliers. A good system considers accounts receivable and payable, and saving a reserve fund. Businesses can seek help from financial advisors or software.
A cash flow system is a management system that allows an administrator or manager to closely monitor cash flow and ensure that it is adequate. While companies make money by buying and selling products or services, the money that comes in is often very important. Customers may be required to pay only occasionally, but bills and payroll may need to be paid before these payments are received.
For small businesses with just a few employees, managing a cash flow system can be a cinch, but if and when the business starts to grow, it can quickly become more difficult. Employees are dependent on the money they are paid and if there is not because there is not enough payroll then it will not only affect morale but can lead to high turnover. Bills that cannot be paid can prevent suppliers from delivering. Even if the business model is solid, if cash flow is an issue, the company could be in serious trouble.
A good cash flow system will look at all of these issues, paying particular attention to accounts receivable, money owed to the business, and accounts payable, money the business owes to someone else, such as a supplier or utility. Payroll can also fall under accounts receivable, but this part of the business is usually dedicated to external accounts. There may be a way to manage these accounts, such as restructuring the billing cycles so that the company receives more constant inflows and outflows.
Managing the available cash is also important. Saving this money to use as a temporary measure to pay bills until it can be replenished is a common strategy. This is often called a reserve fund and is used until cash flow can replenish it, acting like a reservoir in a water system. The money can be held in an interest bearing account to create even a little residual income for the business. The reserve fund is not an emergency account but is part of the system.
Those having trouble creating a proper cash flow system on their own have two different options. A cash flow analysis by a business financial advisor can be done to help set up a custom system for a business. There is also software available that can handle some of these tasks, although this usually requires the user to have some cash flow skills.
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