In our last blog we looked at what is meant by cash flow. Here we have some reasons why cash flow is important to your small business.
Small Business Help – Why Cashflow is important
Cash flow enables you, the business owner, to plan for those times when sales are not steady. Building up a sufficient flow of cash to ensure your business is able to account for times of the month that expenses are higher than others can take time.
The interesting thing about cash flow is that we tend to not pay attention to it until suddenly we are behind on all payments and don’t know when the next sale will happen to cover the debts.
Understanding the welfare of your business requires more than looking at the total dollars coming in versus the total dollars going out.
More times than not, poor cash flow management will certainly cause business failure.
Cash flow is extremely important to any business small or large, as without cash generated by the business activities, injections of cash by borrowing or from private sources, the business will fail.
Keeping it simple, many businesses have been profitable, earning good incomes for the owners, but Cash Flow problems arise if the Debtors ( Accounts Receivable) are not paying their accounts on time. In turn the business is not able to pay it’s suppliers. As well on the spending side, if you are withdrawing funds from the business, more than you are earning, this too can lead to cash flow problems. Suppliers, landlords, banks etc require to be paid promptly, on time. If you are experiencing difficulties then keeping the communication lines open can mean the difference between acceptance & understanding of your issues and working through them, or having your suppliers pull the plug on your business..Without their cooperation your losses could be huge!
Short term cash flow problems in business are common and many can trade their way out, into positive cash flow territory. As stated above, keeping your head buried in the sand, seeing the warning signs yet doing nothing is not the answer. To this end many business prepare a cash flow budget, which is concerned only with cash inflows and outflows on a period by period basis. This is often weekly or monthly. The budget should highlight in what periods trouble could arise. The budget should also be updated with actual figures, again to give more accurate information of the cash needs of the business.
This has been a quick overview on why cash flow is important, the subject certainly has more breath & depth than reported here. Keep in mind that not paying attention to cash flow can mean business failure, this is not an exaggeration.
Thanks for reading & we would be interested to hear your comments.
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