As the owner of a business or corporation, one of the biggest challenges you can run into is how solvent your organization is. A financially sound company is important in that it carries less debt, and can take more risks to continue growing. One way to assess the financial solidity of your company is by analyzing your cash flow and cash position.
Cash flow is the amount of cash generated from multiple profit streams, including operations and lenders, during a certain time period. For most companies, cash flow is calculated on a quarterly basis and is used to assess the difference between total income and total expenses. Whatever this difference amounts to can be carried over to the next business quarter and be included in your company's cash position.
Importance of Cash Flow
While cash flow itself is not an indicator of how profitable a company is, cash flow can give you a better idea about your company's cash position. Also, a positive or negative cash flow can determine how financially "healthy" a company is. For example, a positive cash flow would indicate more stability versus a negative cash flow, since positive cash flow would point to a company's capability to meet obligations like payroll or paying suppliers for goods.
Cash position is the amount of cash reserves your company currently has on hand. There is no "right" or "wrong" cash position to have; instead, the best cash position for your business may vary depending on certain factors, such as whether you are running over budget for the month, or if you have increased payments to make to suppliers. For example, if you are anticipating large unforeseen costs as your business grows, you may choose to keep a high cash position to make sure you're covered.
Importance of Cash Position
A cash position demonstrates how viable a company's business is. The amount of cash your company has in reserves gives you more freedom to take business risks with investments, or significantly pay down burgeoning debt. For example, if you are waiting for a loan request to be approved by a bank, you will more likely be offered a business loan if you have a healthy cash position. Also, with a healthy cash position you can better beat competition in the industry by spending more on business acquisitions and marketing costs.