WHY A HEALTHY CASH FLOW IS IMPORTANT

Paul Skene

Peter Baskerville, Queensland University put it perfectly, “Cash flow is as important to a business as blood is to a body and as fuel is to a flying aircraft. Without it, life-support systems fail and the business crashes”.

Cash flow is the overall change in your company’s cash position from one business period to the next. If your company is taking in more cash than you are sending out, you will maintain a positive cash flow. Reversely, you have a negative cash flow if your company has more cash outflow than it does inflow. Too many financial workers and investors, cash flow is an important indicator of financial health.

It sounds easy, doesn’t it? Unfortunately, for many businesses, even profitable ones, cash flow can be the fundamental reason for their demise. Without cash, your business can’t and won’t run! Your employees may become grouchy and suppliers may stop shipping you.  Contrary to popular belief, you can run out of cash while your business is still being very profitable.

To make the cash flow work for the small business and not against it, there are three things to keep in mind:

First, spend as little as possible. Acquire the inventory that is needed, but don’t plan to stock up and save inventory for later. Remember that “later” may never come if there is no cash flow to back it up!

Second, don’t buy what the business doesn’t need. This will help with the cash flow and keep you in business for long.

Third, bill customers quickly.  You cannot to put off billing a client. Also, remember that in the cash flow process that customers do not always pay on time. Leave a slight amount of money in the cash flow to compensate for any bills that are not paid on time.

When looking at your businesses cash flow, be sure to set aside money for your needs first. The cash flow has to be able to let the business stay operational. It is so important to have the money needed for inventory as well as payroll and other operating expenses. It becomes too easy for business owners to overestimate the cash coming in and greatly underestimate the cash needed for operation. Keep cash available in a small business for all the little things that add up!

To keep your cash flow under control, all cash must be monitored and actively managed continually. Now you know what cash flow is, put that knowledge to work for you!

More articles

Preloader