Merchant Services

Why is Cash Flow so Important a Small Business? : Our Business News

There is a lot that goes into determining the financial health of a small business. More important than profit and loss, at least in many cases, is cash flow. Why? Because cash flow represents a company’s power and capability. It represents the main asset a company has for continuing to do business for the foreseeable future. Without a positive cash flow, maintaining business health is extremely difficult.

This is why so many companies place so much importance on cash flow. If you are new to business, this is a principle you really need to wrap your brain around. How your company is doing in terms of its cash flow could be an indicator of things to come – for good or bad.

Positive and Negative Cash Flow

Understanding the importance of cash flow begins with understanding both positive and negative scenarios. A positive cash flow scenario shows that your company is taking in more cash than it is paying out. A negative cash flow scenario is just the opposite. Note the importance of the word ‘cash’ here.

Accounts receivables are not cash. They represent cash your company might receive at some future point, but they are not cash right now. The same is true for payables. So simply looking at your receivables and payables does not give you a true indication of your company’s cash flow position.

The only way to fully understand cash flow is to look at your bank accounts. Compare deposits against withdrawals. Compare credits with debits. Whatever phraseology you want to use is immaterial. The point is that your business bank accounts offer a clear picture of your cash flow over whatever period of time you choose to measure it.

Tracking Cash Flow is Critical

Every business requires cash to operate. First and foremost,  a company needs cash to pay its employees. Employees are not going to accept IOUs or 30-day terms on their weekly pay. Above and beyond that, a company needs cash to purchase supplies, keep inventory aligned with demand, invest in capital improvements, etc.

The thing is, you can never really know your cash position if you don’t track it. A business that is not tracking cash flow is inviting problems. And by the way, tracking should always be compared to future estimates. Such comparisons make it possible to tell whether or not your quarterly forecasts are on the mark.

Ways to Increase Cash Flow

Given the importance of cash flow to business success, you might find yourself in a position of having to increase cash flow to keep things going. There are lots of ways to do this, some of which are listed below. Note that for most businesses, improving cash flow is rarely a matter of changing just one thing. It is a combination of things that make for better business.

1. Utilise Short-Term Financing

One of the first things that come to mind is short-term financing. For example, taking a Loan To Pay VAT will spare you from having to drain the bank account when your next VAT return is due. VAT loans are short-term loans that can substantially increase your cash flow in the moment. Short-term financing is obviously not a permanent solution to cash flow problems, but it can help in the here and now.

2. Increase Your Prices

Instituting price increases is always an option when cash flow is consistently negative. It is not an extremely popular option for obvious reasons, but sometimes price increases are the only way to get a company back on track. One thing that might help you feel better about increasing prices is to check your competition.

You may find that your prices are considerably lower than what your competition charges. If that is the case, your prices could actually be the number one reason you are having cash flow problems. Raising them to be more in line with your competitors will go a long way toward solving your problem.

3. Be More Aggressive with Receivables

Cash flow problems are sometimes partly attributable to lax receivables policies. You may have a company that sends out invoices with the expectation that most customers will be late to pay. But rather than stay on top of those customers, the billing department lets it go. One month becomes two, then three, and so on.

Being more aggressive with receivables is the solution here. If a company’s normal terms give 30 days to pay, billing staff should start making phone calls or sending letters on the 31st day. Allowing invoices to remain unpaid past acceptable terms only put stress on your business.

4. Change the Terms

Hand-in-hand with being more aggressive is considering a change of terms. Perhaps that same company allows 60 days for payment. It might be time to cut the terms to 30 days. A company offering 30 days may have to reduce it to 15. It might even be necessary to make all invoices payable upon receipt.

Cash flow is important to businesses of all sizes if for no other reason than the fact that companies need cash to pay their own bills. Despite the fact that we live in a credit-heavy world, cash is still king at the end of the day. If your business does not consistently have positive cash flow, you are headed for trouble. Consider all of the suggestions listed here for increasing it. They may be your only lifeline.