Operating a business can be stressful. As the business grows, an increasing number of bills and streaming, sometimes it is difficult to pay all the revenue stream of the company. Many people now start talking about cash flow and liquidity, as if they were the same thing. However, these two terms represent two totally different concepts.
What is Cash Flow?
Cash flow refers to the movement of money in and out of a business. When cash from a customer is received, it is known as cash flow. When money is paid to a seller, it is a financial outlay. A financial statement, which must be prepared monthly showing the amount of cash generated by business activities.
What is liquidity?
Liquidity refers to the ability of a company to convert its assets into cash to pay short-term financial obligations. Cash flow and liquidity are not the same thing. Cash is good, like other things, such as buildings, production equipment and vehicles. Some types of activities are easier to convert into money of others. For example, it is easier to quickly sell stocks and bonds in exchange for money that is going to sell a piece of millions of dollars of specialized production equipment. The liquidity of a company can be measured by analyzing its financial statements, a financial statement showing a company’s assets, liabilities and owner’s equity.
Increasing cash flow
Improving/increasing your cash flow is a way to make a healthier society. Cash is the lifeblood of any business, as it offers the opportunity to buy goods and pay liabilities. Offer discounts for early payment is a way to increase the speed of cash flow. In addition, to ensure that customers do not pay later by the establishment of a collection process is another viable option for improving your cash flow form.
Companies should strive to be as liquid as possible. The benefits of adequate liquidity can not be underestimated. The most liquid company more chances you have to pay your financial obligations in a timely manner. Liquidity can be measured using financial ratios, such as current ratio, which is calculated by dividing the current assets of a company by its current liabilities. Current assets can be easily converted into cash; Current liabilities are short-term financial obligations. Relations between 2.0-3.0 ensure that a company is liquid enough to pay its financial obligations in the short term.