Analyzing the financial health of your business is important to the continuation and growth of your enterprise. Understanding how your sales and net income impact your cash flow helps you to qualify for loans and investor funding to expand your business. If your company is experiencing a decline in sales and net income, your cash flow can suffer, forcing your to consider a different marketing approach or business model.
Net sales, or sales revenue, is the amount of money made by the movement of products or services to customers minus any returns. Net sales minus the cost to buy or manufacture the products is the gross profit amount. Sales are key in determining a company's financial status. If products or services are not being sold at a price or volume to support operating and other expenses, a business cannot survive or thrive, especially in a down economy. Therefore, tracking net sales by source, such as representative or online store, is vital to understanding where your revenue is generated and how to increase it.
Net income is calculated by subtracting the operating expenses, such as salaries and rent, from your gross profit, which is based on your sales revenue. Net income tells you if your business is profitable. This does not indicate the amount of cash that you have on hand, but whether your sales can support what you need to run your business. If not, then you may have to increase the price of your products or explore how to obtain them for less. Otherwise, you will be forced to decrease your staff and other large expenses or evaluate the wages that you pay.
Cash flow is the amount of money that is received and spent by your business. Incoming cash flow is realized through operations, investments and financing. Sales revenue is the portion of cash flow through operations. Once your net income is determined based on your net sales amount, you must make adjustments to find your accurate cash flow. Depreciation of assets, accounts payable and accounts receivable are examples of the adjustments added or subtracted to determine actual cash flow. Depreciation reduces your tax burden, so the amount is added to net income. However, accounts receivable that have not been paid decrease your cash flow.
When sales and, consequently, net income decline, the impact on cash flow can be detrimental to your business. Without available cash to pay your creditors, purchase inventory and equipment, or pay your sales and support staff, your business may not be able to survive for a long period of time. If you compare your cash flow amounts from month to month, there should be an overall increase or, in a down economy, a steady cash flow can be acceptable. When you experience a cash flow decline, it may indicate that your business activities cannot be supported by your current volume of sales and net income.
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