A company needs money to get by, just as your body needs blood coming from its veins. Even if profitable, without cash flow, it can’t cover the day-to-day costs and keep it in business.

The key to business cashflow analysis is to make sure there is enough cash for bills, investment, and expansion. Cashflow Statement: Cashflow statement captures your company’s inflows and outflows over a period of time.

Profitability

Profitability is also part of business viability and expansion. Although profitability represents financial performance on the spreadsheet, its real effect can increase or decrease cash flow – there is a fine line between cash flow and profitability, but knowing the difference can help organizations make smarter decisions.

Profit is defined as a company’s money that’s been generated while Cash flow is defined as the total net cash flow from outflows for a given period. Outflows — either sales, investment, loan or anything else. Outflows can be as a result of inventory or debt repayments.

Cash flow is positive, companies can get paid and invest in new opportunities, and cash flow is negative, the company is spending more than they are earning and will ultimately run out of money — it can be avoided by cutting costs and improving the collection/credit process.

Inventory

Inventory contributes a significant amount to business cash flow. As selling to customers is an expense to the P&L, the holding on to that stock locks up capital that would otherwise be deployed in sales.

Keeping your stock up to date with demand is of prime concern for cash flows. Demand forecasting and historical analytics can tell you the quantity of each product SKU that you should stock per day.

Inventory management helps in lowering the expenses and optimizing the business profit. Dead stock: This wastes cash, space and decreases margins. Cost-saving strategies for inventory, such as cycle counts or spot checks, identify and fix errors – they also save shipping, storage and theft expenses, boosting the bottom line and giving you capital to expand the business.

Accounts receivable

Companies also provide their clients or customers with the option to buy products or services on credit, accounting receivable in the books of accounts. Once cash is converted, that asset has to be eventually converted into current assets on its balance sheet and exempted from receivable on its cash flow statement.

Accounts receivable can easily multiply due to a growing sale or non-payment from creditors, putting extreme pressure on the cash flow of the company and restricting activities.

We can fight back against that. A more aggressive collection or incentive for quicker payments would be helpful, although aggressive strategies will only hurt customer relations and make them cancel any future business. Nonetheless, reducing DSO rapidly will allow improving working capital management and facilitating growth strategies.

Accounts payable

Accounts payable (sometimes called trade payables): These are the payments made to suppliers for purchased products and services. Accounts payable stand out as a current obligation on the balance sheet, Managing accounts payable is key to allow a company to tailor the payment terms to the company’s cash flows and standardized payment terms to both parties.

While it’s easy to see how accounts payable influence cash flow, not everyone understands that they are mutually connected. Well kludge, there is more cash.

A good accounts payable team has a automated process that focus on invoices and enables employees to get deals with vendors. Also, this section has to pay on time and record every discount and rebate; monitoring age trends and trends are a part of it. Also, in the final step costs of shipping & taxes needs to be centrally maintained as well.