There’s a reason why “Cash is King” is a common saying in the business world. Everything grinds to a halt when there’s no money. Cash flow is very important for every business, but the effects tend to hit smaller businesses more. Zero cash flow means small businesses that haven’t had the time to build a nest egg would likely close up. On the other hand, healthy cash flow gives small businesses a chance for expansion and growth, which is heavily beneficial to them.
Here’s a surprising stat. More than half of small businesses that pack up go out because they don’t have enough money to keep running.
But what is cash flow, and how does it affect small businesses?
What is Cash Flow?
Cash flow is defined as the total amount of money that moves in and out of business within a specified time (most businesses analyse their cash flow monthly). The two aspects of cash flow are incoming and outgoing cash and businesses struggle to keep the former larger than the latter. To make this happen, business owners employ cash flow management strategies while closely monitoring their cash flow analysis.
Cash flow doesn’t just pose a threat to the operations of small businesses, there are many other reasons why it’s an essential metric.
Here are seven reasons why cash flow is vital for the survival of small businesses.
Know When To Expand and By How Much
Every business dreams of expanding. For small businesses, expansion is the next step in the business plan. The only problem with expansion is that it needs a lot of money. Unlike other production costs that yield returns in sales, the money used for expansion might not yield any immediate returns.
Without a positive cash flow, you can’t afford an expansion. Also, the state of your business’s cash flow lets you know how feasible getting a loan would be and if you can comfortably repay the borrowed amount.
Helps Business Owners Make Better Decisions
Because businesses run on money, the state of a business’s cash flow affects most, if not all, business decisions. The information obtained from your cash flow analysis doesn’t just have to be accurate, it needs to be timely, so decisions reflect the actual state of the company’s financial capacity. This, amongst other reasons, is why most businesses carry out a cash flow analysis each month.
Suppose you don’t have access to an accurate cash flow statement. In that case, chances are very high that you’ll make decisions that harm the company at best or threaten its existence at worst.
Carry Out Business Operations
As stated above, businesses need enough positive cash flow to run day by day. These costs are known as overhead costs, and they include the cost of production, the cost of utilities, etc.
Cash flow is essential to running small businesses because, unlike their bigger counterparts, small businesses are less likely to have a cash reserve to help them through the lean days. So, if they don’t record positive cash flow for a while, they would simply be unable to keep their doors open.
As a small business, you must maintain a positive inflow of cash.
Manage Your Money Better
Small business owners wear many hats, and one of them is that of the financial manager. As stressful as it can be to track your money down, this role helps give small business owners clear insights into where their money goes and how they can cut down on unnecessary costs. Suppose you’re a business owner planning an expansion. In that case, this exercise will help you put money away from unnecessary expenditures and save it to fund your expansion.
But most importantly, it helps businesses understand the dynamics of their cash flow, and the information gleaned from this is invaluable. It can be used to make cash flow forecasts, inform business strategies, and provide insights on the efficacy of debt collection solutions.
Helps You Manage Slow Periods
Every business has times when the cash flow is overwhelmingly positive, and there’s a surplus of money. It also experiences lean times when things aren’t as rosy and cash flow is negative. Having a cash reserve makes the hard times easy to get through. Small businesses or not, you should have a cash reserve for rainy days, and you can build one by managing your money when you have a lot.
Build a Valuable Business
You might want to sell your business one day or ask investors for money. When that time comes, they will want to look at your cash flow statements. Analysing your company’s cash flow would make your business a valuable asset or a liability.
If you have been able to manage your cash flow, adjusting business strategies for better results and growth, you will have positioned your business in the best possible way to get favourable responses.
Makes Planning for Late Payments Easy
Late payments are a common occurrence for any business, small or large. In small businesses, too many late payments can adversely affect the cash flow with heavy consequences. Cash flow analysis can provide insight into the extent of late payments.
The data from cash flow analysis on late payments can improve your debt collection strategies. You can pinpoint and remove collection solutions that aren’t effective and replace them with effective ones.
Tips on Improving Cash Flow For Small Business
Managing cash flow can be stressful, but here are a few tips that might help.
- Use credit control software to track your invoices and improve payment rates;
- Use a professional debt collector to handle clients who aren’t responding to invoice payment reminders;
- Carry out regular cash flow analysis and use the results to make business strategies aimed at managing and improving cash flow;
- Start forecasting cash flow;
- Manage your overhead costs.
Cash flow shows the financial position of a business from month to month. Paying attention to cash flow analysis informs small business owners of the state of their business and can lead to better decisions and a higher potential for growth.