4 reasons why cash flow is important for small businesses
Financial planning is an essential aspect of running a business. Here are four reasons why your company needs to have a positive cash flow.
'Cash is king' because to run any business you need sufficient funds to keep your company afloat and be cognizant of all the cash coming in and going out to make better decisions.
For a new startup, it is even more crucial to keep an eye on the cash flow from time to time to avoid running out of funds. In fact, Forbes found out that 82% of businesses fail due to poor management of cash flow.
Here is how and why cash flow cannot be ignored.
What is cash flow?
If you are new to the concept of cash flow, here is a quick definition for you. As the name suggests, cash flow is nothing but the money coming in and going out of your business. If you have a positive cash flow, it means your company is getting more cash than losing—which is as good as profits.
On the other hand, a negative cash flow is vice-versa. However, this indicates that your business may not have sufficient funds or cash to operate.
An important thing to note is that cash flow should not be mistaken for profits. Profits come on top of the revenue you generate whereas cash flow tells you about the inflow and outflow of money.
Here are four reasons why cash flow is important for small businesses.
Make informed decisions
Learning about your cash flow gives you a reasonable estimate of when your business has money and when not. This is crucial information that can be used to plan your finances and expenditure. Without having clear or accurate data on your cash flow, making any decisions will be a challenge.
For example, you may unknowingly spend too much on raw materials, salaries, and fixed asset costs, unaware that your bank does not withhold the respective cash currently.
Such a scenario will put your business at risk as your cash flow may not be good enough. You need to make a cash flow forecast, this will give you more relevant data of the money that you currently have.
Understand cash outflow or expenditure
Having a cash flow statement not only gives you insights but also gives hints about managing costs effectively. You will come to know where exactly your money is outflowing and how much. If you are looking for data on budgeting, these flow estimates will do the job for you.
Additionally, knowing all your business costs can assist you to find expenses that are perhaps not a requirement for your company right now. So, you can reduce your liabilities and put that cash into good use.
Improve cash flow
Understanding your business accounts isn't easy, especially if your expertise isn't in finance or accounting. Cash flow statements are pretty straightforward and also help you foresee the direction of your company.
Now, if you have estimated the cash flow and let's say it does not look good, that same statement can be used to identify areas of improvement. List down all the costs and see check when your bank has sufficient funds to payout the expenses.
Scale your business at the right time
Bigger business means bigger profits. It is something that all startups strive for to expand their company, team, explore new markets, etc.
Growing your startup will require a lot of cash, including ordering goods or stocks, hiring more staff, renting more technologies and services, etc. Not having enough money to keep up with upgrading your business is not a good sign and it will impact the company for the long-term.
In short, positive cash flow is a green signal for small businesses to take it up to the next level. However, doing so immediately or without analysing your fund capacity, is a risky move. So, monitor your cash flow closely to find out the best time your startup can finally spread its wings and expand.
Edited by Kanishk Singh