What is Cash Flow & Why Does It Matter?
No business can afford to ignore its cash flow, but exactly why it matters can often be overlooked, with many businesses placing their focus exclusively on the profit and loss (P&L) balance sheet.
We’d like to share some of the reasons why we believe managing cash flow is so important to businesses. Firstly, let’s get back to basics and establish exactly what cash flow is.
What is cash flow?
The clue is in the word ‘flow’. Simply put, cash flow is the money moving, or flowing, in and out of your business over a given period of time. It represents your overall financial health as a business.
Cash inflows can be from customers who are buying your products or services, or from investments and borrowing. Cash outflows are your expenses, for example wages to employees and payments to suppliers for things like equipment and materials.
Simply put, in order to keep your cash flow positive, you need more money inflowing than outflowing. It can, at times, feel like cash flow only goes one way – out! But it most definitely flows both ways and you should think of it as the blood running through the veins of your business. Your cash flow needs an ongoing health check and must be constantly circulating for your business to run successfully.
So why does cash flow matter?
1. Cash is king
Yes, it’s an age-old phrase, but it’s a good reminder that cash offers more stability, control and power than any other asset you have in your business. No matter how profitable you think you might be, it simply doesn’t matter when there is not enough cash in the business to pay the salaries for that month. Most businesses fail not because they are poorly run but because they simply ran out of cash. What do they say…profit is vanity and cash is sanity?!
2. You are prepared for the unexpected
Cash gives you options and will help you weather the storms – be it a global crisis like Covid-19, losing a key customer or replacing essential equipment that has broken down at short notice. It’s wise to have cash reserves for these scenarios.
3. knowledge is power
Monitoring your cash flow closely and understanding how money flows through your business is vital. It can reveal patterns and insights that put you in the best position to make strategic business decisions …and grow!
4. Business resilience
Ultimately, the success and resilience of your business is tied to your ability to maintain healthy cash flow. If you run out of cash it can impact you in so many ways, taking on new work, paying suppliers or even paying your staff, so keeping a close eye on your cash is as important as it gets.
There are lots of things that can contribute to poor cash flow, from lack of budgeting and overspending to unplanned expenses. Surprisingly, it can also come from rapid growth or overtrading.
A significant contributor for many businesses is long payment terms or late payments from suppliers. Waiting lengthy periods, sometimes in excess of 120 days, to be paid for work that you have already completed can be soul destroying – as well as being a really limiting factor for your business.
Bridging the gap between you and your customers by shortening the length of time you wait to be paid is a really proactive and positive step to take in cash flow optimisation. Not only will it free you up to focus on growth but it will make your business far more resilient.