Why Cashflow is Important

By Ram - Jan 19 2024

Cashflow is a sensitive matter for every business, new and established. It is one of the primary factors that determines the ability of a business to survive and thrive. While many businesses focus on making a profit, and they do, if they don’t have cash flow, they sink, even with a substantial profit margin.

In this blog, we look at what cash flow is and why it is so important to the survival of a business and its success.

What is cash flow?

Cash flow is the amount of cash flowing in and out of your business over a specific period. Businesses with a steady stream of incoming cash are said to have a positive cash flow, while those spending more than they are bringing in are said to have a negative cash flow.

If your business has a negative cash flow, it is a red flag that your business could be heading towards failure. When you have a negative cash flow, you aren’t making enough money to cover the cost of your operations. Unless you can figure out how to manage your cash flow better or reduce spending, your business is on its way down.

Why Does Cash Flow Matter?

Cash flow is an important measure of your business’s health and eventual success than your revenue or profit.

Without cash, you can’t pay your bills, buy inventory or keep up with new orders and clients and most importantly, you can’t afford to invest in your business’s future.

There are different types of cash flow, such as cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.

All these types of cash flow have varying indications of the financial health of your business and are captured in your business’s cash flow statement.

Why not also read: Cash Flow Problems and How to Fix Them

A cash flow statement tracks how money moves in and out of your business. It lists your sources of cash and breaks them down by the type of cash activity and transaction date.

As a business owner, you should check your cash inflow and outflow by getting regular cash flow statements.

5 Reasons Cash Flow is Important for Your Business

Predictability

Cash flow gives you the clearest picture of how your business is doing. While a profit and loss statement is also important, the more frequent cash flow statement paints a picture of where your business is at any specific time. By maintaining a positive cash flow, you’re almost certainly turning in a profit. But this could be subject to expenses and other factors.

Stability

A positive cash flow points towards a more stable business model. It indicates that you can keep up with payments to your suppliers and expenses and make such payments on time. A positive cash flow can help you build a professional reputation and avoid late fees and other penalties that could negatively impact your business or make running a business harder and more expensive.

Growth

A positive cash flow also ensures you have cash on hand that you can use to expand your business. You also avoid high-interest loans and streamline your business towards growth. This can be hiring new employees, upgrading equipment, or making new additions. Also, a good cash flow is a good sign for future financing opportunities.

Flexibility

Knowing your cash flow situation can help you make quick and more self-assured decisions. If your cash flow is good, you can easily take advantage of emerging opportunities with certainty that the business can sustain the growth or the acquisition that you come across.

Improves success rates

A good cash flow indicates that your business is primed for success. It is one of the foundational pieces for success.

How to Improve Your Business’s Cash Flow

Seeing how important cash flow is and what it says about your business, it is vital to make the necessary changes to improve your cash flow and give your business better chances for survival.

The road to improving your cash flow starts with determining the hindrances that are limiting your business’s cash flow.

High expenses

Sometimes, the cash flow crunch in a business is its own doing. Having too many expenses can eat into the business’s cash flow. You can address this by restructuring the business’s expenditures and tightening the ropes to control expenses and ensure they match the business’s income.

Unpaid invoices

The most common one is delayed invoice payments by clients. Many SMEs in Australia struggle because of the long waiting periods required to clear invoices. Typically, the waiting period is 30 days, and many clients take substantially longer to clear the invoices. During this time, the business is expected to keep up with its overheads, make payroll, and deliver to new clients, among other expenses. This strains the business, usually pushing it to get loans to plug the cash flow gaps.

Businesses can handle delayed invoice payments in several ways. The first one is to offer discounts to clients who pay the invoice sooner. This can encourage faster invoice payments among clients looking to make savings in their businesses as well. Alternatively, you can add late payment fees to discourage overdue payments.

While these are effective methods, they don’t substantively address the cash flow issue. Companies like Key Factors can help you with more practical solutions that give you control over your finances, even when clients take their time to pay the invoice.

With our range of factoring and invoicing factoring, including debt factoring, invoice finance, invoice discounting, debtor finance and cash flow finance, you can leverage your unpaid invoices and quickly inject cash into your business.

We can advance you up to 80% of the value of the unpaid invoice, and you choose the invoices you want to finance. The funds are usually available in your account within a few hours, saving you the hassle of applying for a loan from a bank. Because this is not a loan, you don’t have to worry about increasing your monthly expenses through monthly loan premiums.

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