Cash Flow is an important factor in all types of businesses. Although people tend to focus more on sales, and profits, cash flow is a crucial part that is often neglected. You cannot get a complete picture of your current financial status just by evaluating the profits or sales of your company. This is especially important for small businesses and startups. Monitoring cash flow is mandatory for the business to run smoothly.
In this article, we will discuss more about it and why proper cash flow management is necessary to run your small business smoothly.
What is cash flow?
Cash flow is the flow of money coming in and going out of your business. It is very different from the sales or profit of your company. When you have more money coming into your business in comparison to the amount leaving it, it is a positive cash flow. Conversely, negative cash flow is when more money leaves the business than the amount coming in.
When you have a negative cash flow in your business, it becomes difficult to cover all the expenses and keep your small business afloat. This is why it is said; cash flow can both build and break a business. Many small businesses have comparatively higher sales figures but run into a liquidity crisis and lack of funds.
Reasons why cash flow is important for your small business
- Cover short-term debt: Almost every business has small debts. If you can keep up with the repayments, you can have a good cash flow. Positive cash flow ensures that all suppliers and staff of your small business are paid on time. Hence, it helps in maintaining a good business relationship.
- Expand and seize opportunities: Positive cash flow is most important when expanding the business or investing in new projects. Considering you want to open a new online store for your small business, a poor or negative cash flow will bring lots of issues and hurdles.
- More negotiating power: You can be in a much stronger position when you have the cash to spare and make purchases without any credit or financial puts. There are also better chances to access more advantageous trade terms with suppliers if you pay upfront without the need for credit.
- Access finance when required: At times, business loans become necessary. If you have a positive cash flow, getting credit permission becomes much easier. A good cash flow ensures that you will be able to make all the repayments in time. Getting loans also becomes a lot easier with low-interest rates.
- Easier to navigate downturns: Business is about keeping your company afloat in the market. There might be instances of your small business hitting a bumpy spot or facing economic downturns. However, if you have enough money in your bank account, you can still stay calm and get through this rough patch. Therefore, you can get back on track quickly once the situation stabilizes and the business starts running smoothly at its normal pace.
- Create a more valuable business: Hypothetically speaking, someday you might no longer want to run the business and instead wish to sell it. All the potential customers will first look at the cash flow. In fact, investors you may wish to work with in future will also look for the same. They will first see the business’s stability and success before they invest or purchase it. The profits and cash flow are significant factors in this decision. The more positive the cash flow, the more valuable your business becomes.
- Better planning and decision making: When you have a smooth flow of cash, you have a better cash reserve, and hence your ideas become easier to execute. Thus, you can plan in an innovative manner. Decision making for the expansion of the company in the future will also depend on the business’s cash flow. With positive cash flow, you can easily plan without the fear of paying high bills. Besides, you can take more time and make a long-term strategic decision for your company for future growth.
How to ensure a positive cash flow?
Here are some key steps to manage a healthy cash flow for your small business.
- Tackle late payments: Late payments create many issues in maintaining a positive cash flow. Thus, try to offer early payments as an incentive in case of tackling late payments.
- Prepare cash flow records and conduct daily cash flow analysis: To get a better insight into your business’s cash inflows and outflows, you must prepare cash flow statements and records.
- Make use of invoice financing: If you have frequent late payment issues, use invoice factoring or financing.
- Cash flow forecasting: A cash flow forecast will provide you with a clear idea of what your small business’s financial future will look like.
To conclude, cash flow is a crucial factor for all types of small businesses as well as startups. It helps your business to run smoothly and grow better in future. Therefore, you must prioritize it as much as the profits and sales of your company.