Why cash flow is important for your business!

Did you know that 82% of businesses that go out of business cite cash flow as the main reason!

Scary right? But not if you’re managing your cash flow.

If you’ve got plans for your business, you’re going to need cash to make them happen. Dreaming big and running out of money isn’t a situation a small business wants to find itself in, which is why cash flow is critical to sustaining and growing a business.

What is cash flow?

It’s the total amount of money that come into and out of a business.

Cash flow management can make or break your small business, and not enough people understand the real value of managing their cash flow properly.

You might make the mistake of spending because your P&L might show that your business is profitable. But that’s not always the whole picture. On the flip side, not knowing how much cash will be in the business in the future means you might be more hesitant to spend money when actually your cash flow is healthy enough to do so.

The message here is: everything comes at a cost. Missing out on opportunities because you weren’t sure if you could spend money is equally as damaging as overspending for small businesses.

Understanding your cash position is the only way to make confident business decisions without having those ‘what ifs’ hanging around in the back of your mind.

Why is forecasting your cash flow important?

Basically, your business can’t survive without cash flow forecasting. Managing your cash flow allows you to tackle unexpected and planned expenditures, making your spending more efficient.

To make managing cash flow a less daunting prospect  you can use a cash flow forecasting template to understand what your future bank balance will look like. You can then use this information to make informed decisions for your business.

Whether that’s a new hire, upgraded tools, or a move to a larger office, a clear insight into your cash movements is essential. It’s the only way you can be certain you’re making calculated, accurate financial decisions for your business.

The risks of not managing the cash flow in a business can be devastating.

How can managing your cash flow help your business?

1. Know you can pay your bills

Creating a cash flow forecast will help you know whether you have the cash to pay your invoices, suppliers and bills. Staying up-to-date with the cash flow needs of your business is the best way to know how much money your business has, or will need, for a given period.

2. Manage late payments

You’ll be able to practice better credit control and get insight into what would happen if you experience late payments, or not being paid at all, and make arrangements in advance if that were to happen.

3. Understand your working capital

You can plan upcoming cash in and cash out to better understand your working capital now and in the future.

4. Stop overspending

You’ll be able to see exactly what money you have to spend and the impact a purchase will have on your cash flow.

5. Grow your business

Perhaps you want to expand your team? By modelling increased wages against the added revenue new staff will bring in, you can be certain you can afford to take on more staff.

6. Free up cash flow to invest in new products

With a regularly updated cash flow forecast, you can see how much money you can afford to invest in your business and when is the right time to do so.

7. Regulate lumpy cash flow

Project-based work  and seasonal revenue can sometimes result in inconsistent or fluctuating cash flow making it harder to keep an eye on your cash position. By keeping an up-to-date cash flow forecast, you can take action sooner and more effectively to even out those lumpy cash flow periods.

9. Budget for tax payments

You can calculate your expected tax payments and allocate a budget for them. No nasty surprises when your tax bill arrives!

10. Help you apply for business loans

Cash flow management is even more important if you’re considering bank loans or applying for funding.

Banks are notoriously cautious with administering their fund allocation and proving a business’ viability with financial statements is essential for securing funds for expansion and business growth. Being able to produce a solid cash flow forecast can mean the difference between your application being successful or not.

11. You will sleep at night!

Knowing in advance you have the funds to sustain the business is key. Early warning signs will help you make the correct decisions in your business.

Get the help you need to create a cash flow rich business?

Our Cashflow Savvy Academy is now open for applications. Setup a time to chat here so we can help you build a cash flow rich business.

As a business owner, knowing exactly what your cash flow looks like each month is hugely empowering.