Why is Good Cash Flow Management Crucial for Business?
Posted on 6th August 2020 at 15:44
“Making more money will not solve your problems if cash flow management is your problem.”
This profound quote from Robert Kiyosaki notes the importance of cash flow management in a business, and how even a company which is doing well on paper, can suffer from poor cash flow.
Cash flow can be defined as the net amount of cash (or cash equivalents) coming into and out of a business.
So, while you may feel that investing in more stock or offering lines of credit to customers will benefit your business, it can place you at risk. Let’s illustrate.
Cash Flow Unpacked
It’s January 2021, and let’s say that you want to open a wholesale clothing business and you have £500.00 to do so.
You take your £500 and spend it carefully on stock that you know will sell well. A customer sees your stock and loves it and immediately buys it all, making you a tidy profit of £2,000.
However, the customer says that they can only pay you at the end of February, which you agree to.
Your accounting books will say that your outgoings were £500 but your incomings were £2,000 leaving you – on paper – with £1,500 in the black for January 2021.
The problem is that you have no money. At the beginning of March, once your customer has paid you, only then can you go and buy more stock. By then however, you will be a month behind with your bills and probably fairly hungry.
In the same way, cash flow for a business needs to be understood separately from the complexities of your balance sheet.
Cash Flow – Your Safety Net
While a business can run on credit during times of negative cash flow, it’s a dangerous and expensive place to be. And it is a slippery slope, especially for a small business which are generally more ‘cash poor’ while they are working to establish themselves.
It’s been said that revenue is vanity, profit is sanity, cash flow is reality. We second those wise words and would like to highlight the positive benefits that you will gain from focusing on cash flow management.
Business Health Check
An honest assessment of your cash flow will unequivocally show you the health of your business. Yes, creditors, assets and equity are important, but cash flow is a key health indicator of any business.
As a business owner, you hold the reins and a positive cash flow means that you don’t have to make quick, knee-jerk decisions when tricky times come around. A healthy cash flow offers you the benefit of rejecting rushed decisions, and rather making the best decision that you can at the time.
Having a positive cash flow balance allows you to take your business forward and take up great opportunities when they present themselves. You will be in the enviable position of buying up special offers or negotiating cash prices which serve to increase your margins down the line.
Being able to pay your staff, pay tax returns on time and pay your suppliers on time stems from a healthy cash flow. This serves as a protection of your reputation and your business continuity.
When we take the time to reduce our business risk by working out a positive cash flow system, we see immediate benefits. Peace of mind, reduces stress, better relationships with suppliers, lower bank fees on overdrafts – it’s a long list.
Having said all of this, we are acutely aware of the fact that many businesses are battling through the economic backlash of COVID, and that cash flow is non-existent.
What happens now?
How Can We Help You?
The team behind Lending Made Simple are here to help you make better financial decisions, and to give you the tools to do so.
There are several facilities available to businesses which can assist with cash flow challenges and we are well positioned to provide straightforward solutions to help business owners.
We deliver on our promise to provide business owners the cashflow to grow their business, after all, in the words of Fred Adler, “Happiness is a positive cash flow.”
Tagged as: cash flow management
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