Cash Flow Is King – Plan It, Don’t Wing It
Cash flow is king;
We’ve all heard that before and yet so many small businesses fail because their cash flow sucks. In fact, poor cash flow is the number one reason for small business failures; up to 82% of businesses that fail do so because of cash flow. Your business may be profitable but, if you are not on top of your cash flow, especially during start-up or a period of rapid growth you may run into problems. During periods of growth, you tend to need more cash for payroll, stock, training, infrastructure etc. Cash flow is just as important as achieving a healthy profit when it comes to ensuring your success.
Why is cash flow so important?
Firstly, understanding your cash flow allows you to plan and make informed decisions. An up to date cash flow statement informs choices, this might not be the right month to spend large if the cash into the business this month is not what you were expecting. Maybe you have invoices to pay or clients who haven’t as yet paid their invoices, getting on top of those means you are in a stronger position to make decisions on purchases/hiring/expansion.
A profit and loss statement won’t show you where you are spending money. Understanding both your outgoings and incomings allows you to rationalise and control expenditure. Setting up payment schedules allows you to plan for your outgoings and to not be surprised by invoices or, indeed be caught out not having the funds to pay suppliers. Profit is notoriously difficult to predict, cash flow is however something you can predict. It’s what potential investors and creditors will look at when assessing the value of your business.
Understanding your current cash flow position helps protect your business relationships. If you can see a blip happening in the near future you can make adjustments to your business to ensure that you are not in a position where you cannot pay your supplier. Not being able to pay your invoices creates a poor reputation.
Building your business is exciting. Taking on new clients, hiring new staff and increasing your revenue are all positives however if you do this at the wrong time you could create more issues and stress for yourself. Growth requires cash, generally, this happens before the revenue starts to roll in and if you don’t have the funds available to match growth then the business is going into run into problems.
Having good cash flow increases opportunity. A business with a strong cash flow can invest in research, update infrastructure, provide training, buying additional assets. A business with a strong cash flow can operate in a strategic, proactive way rather than a defensive, reactive way.