When it comes to running a business of any size, managing its cash flow is crucial. So, why is cash flow so important for businesses and how can you ensure you successfully manage it?
In this article we will explore:
- What is cash flow?
- Why is cash flow so important?
- How to analyse cash flow
- How to finance your cash flow
What is cash flow?
Put simply, cash flow is the money moving/flowing in and out of your business. Cash flows in from customers who purchase goods and services, money from investors, interest on savings or investments, and so on. Cash flows out in the form of wages, rent, monthly loan payments, taxes, etc.
Positive cash flow is when you have more money flowing into the business than there is flowing out, whereas negative cash flow is when there is more money flowing out than in. If you experience negative cash flow, don’t be alarmed straight away, however if it continues over consecutive months, this may become an issue and you should speak to your advisor.
Why is cash flow so important?
Cash flow is important for businesses as it provides the cash necessary to pay staff, pay suppliers, invest in growth strategies and keep your business operating. Having sufficient cash flow can assist when you are:
Starting a business
Without the necessary cash to get a business up and running, there would simply be no business. It’s quite daunting when you first start a business as there’s a large amount of cash flowing out and little (if any) cash flowing in. You may require some additional cash in the meantime, this is where a business loan may be able to assist.
With so many business financing options available, applying for a business loan can be daunting. So, do your homework and make sure you are fully prepared, with the accurate information required for your application.
Growing a business
Having the necessary cash readily available when you want to take the next step in your business growth, enables you to operate both strategically and proactively. Positive cash flow provides the freedom to invest in growth strategies, i.e:
- Buy and expand
- Purchase new property
- Research and development
- Improve technology
- Invest in your employees through training and various programs
- Purchase new assets
- Have the flexibility to respond to urgent matters and make critical decisions
- Provide dividends to shareholders or owners
- A strong cash flow is appealing when applying for finance
- Ability to offer favourable credit terms
Managing a business
Benefits of understanding your business’s cash flow and being able to manage this cash flow effectively:
- Assists with lending requirements
- Identifies ways to avoid late payment penalties and interest from suppliers
- Gives you an understanding of cash and liquidity for better decision making
- Helps you understand the key cashflow drivers and the cash conversion cycle in your business
- Enables you to predict and plan for large cash outflows
- Drives your business to achieve your goals in a controlled and managed way
How to analyse cash flow
A cash flow statement shows how changes in balance sheet accounts and income affect cash and cash equivalents, breaking the analysis down to operating, investing, and financing activities. It shows what cash is coming into the business and the cash that is going out. Being able to correctly analyse your cash flow statement will ensure you can successfully manage it.
If your cash flow states that the total unpaid purchases are more than the total sales due, you will be required to spend more cash than you receive. This could result in possible cash flow issues and if this trend continues you should seek further advice on how you can better manage your business.
Planning ahead for the timing of your likely cash inflows and outflows allows you to identify the need for a capital injection, an increase in credit or to boost your cash flow in some other way.
How to finance your cash flow
There are various finance options available that will assist in improving your cash flow, and the most suitable option will vary depending on the type of business and its circumstances. These finance options include (but are not limited to):
- Invoice Finance;
- Line of Credit / Credit Cards; and
- Supplier / Trade Finance.
To find out more or to discuss your current situation, contact our offices here and we will be happy to assist.