Cash Flow is a King

We cannot stress how much the cash flow importance to the health of a business. Let me quote “revenue is vanity, cash flow is sanity, but cash is the king”. As a business we would like to see a large inflow of revenue from each sale that we make, but the focus here should be the cash flow. Many business may still be operating even they are making loss especially if they can continue to manage their cash in & outflow, for example, delay payment to creditor so that the business have enough money to pay any variable cost. Ultimately, without cash, no business will survive long enough.

When a large or small amount of cash comes to a business, it is known as “cash Inflow” and this cash inflow come mostly from the sales of a goods or services activity. “Cash outflow” is the opposite where a business needs to pay for cost such as transport, labor, raw material and electricity. The different between both of this is called the “net cash flow” and it can either be a positive value or a negative value. When a business receives more money that they spend, it is a positive cash flow which helps to ensure the sustainability of the business operation.

A negative cash flow is when a company receives less money than its spending. This may let the business to struggle in paying bills and create the needs of borrowing money to help in the shortfall.  In accounting, a clear indicator of a profit and loss is that the loss will be shown in a bracket. Well most of company may have a huge amount of cash reserve to survive; some smaller company may find this as alerting to them.

These come to a reason why controlling cash is essential to business sustainability. Management accountant role will have to be smart in dealing with a range of cash issues that arise.

·         Make sure that there is sufficient cash available that is not tying in any unnecessary activity for future investment.

·         Develop a process and procedure that help to reduce outstanding debt and making sure the inflow of cash is higher than spending.

·         Controlling different level of cash outflow need to be done according to the size of the business. If your business is a car workshop, then make sure the outflow in buying car parts is done meeting the company needs and don’t overspend things.

Written by: Hafiz Hanafi (Comfori Sdn Bhd)

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