Importance of Cash Flow Management for Small Businesses

When you kick start a business from the ground up, there are numerous factors that you have to incorporate and adjust and at the end of it, make it all work in perfect synchronisation. But, this does not happen overnight and it’s all about how badly you want to make it working

In order to make any business work the defining factor is the amount of cash or capital that you have at the ready.

A recent ICAEW survey revealed that 58 per cent of micro businesses which upon keen observation counts for less than 10 employees, 35 per cent of small and medium businesses that comes between 10 to 250 employees, had absolutely no debt.

This revelation got many businesspeople thinking about managing a business without borrowing. The biggest secret here with these businesses is a good cash flow management.

Cash flow is the net change in your business’s cash position from one period to other. If your cash inflow is more than cash outflow, then you have a positive cash flow and vice versa.

Why is cash flow important?

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You may think that profitability of a business has the upperhand when it comes to running a business successfully. But, there is an old saying that no business ever went downhill because it lacked profitability. It went under owing to insufficient cash flow. Having cash at the ready allows a business to operate smoothly.

So, managing your cash reservoirs efficiently while also ensuring that you have enough to make ends meet – for instance paying wages, purchasing supplies, meeting personal requirements etc is vital for business longevity.

Most business ventures commence with a small amount of cash from the proprietor. As the business goes on to succeed, it accumulated enough funds to cover the bills and other expenses.

Problems often begin when businesses start offering credit to customers. If this continues, the business will find itself neck deep in debts and it would pose a significant threat on business continuity.

Conduct a Cash Flow Forecast

It is crucial that small businesses maintain accounting records with perfect accuracy and diligence. This could be done in a manual cashbook, on a computer using a spreadsheet or by using accounting software, or better yet by employing accountants Northampton. The point is that accounting records allow businesses to instantly find out how much is owed from customers and the amount that is yet to be paid to the suppliers.

Irrespective of the system that is being used, the records should provide the basis for preparation of a cash flow forecast. You can look at all the expenses and incomes of the business and based on it predict receipts and payments from future purchases and sales spread across the forecast period.

 

Cash flow forecasts elemental in the entire management process. This will highlight the times when the business is more likely to run low on cash and can form the basis for a remedial action plan countering the situation before it becomes unmanageable.

 

Additional Points Highlighting The Importance Of Cash Flow

  • Cash King

The vitality of a strong cash flow is appropriately stated in the common expression ‘cash in king.’ The basic premise of this concept is that having cash puts you and your business in a more secure position with an improved purchasing power. While you can resort to borrowing at times, possessing cash provides you a greater level of protection against loan defaults and foreclosures. Cash flow differs from cash position. Having cash on hand is significant, but cash flow signifies the ongoing ability of a business to generate and utilise cash.

 

  • Keeping up with debt
  • Debt

When you borrow money to purchase equipment, inventory, buildings etc you basically use future cash flow to finance these purchases. Intrinsically, what you need is positive future cash flow to address your debt commitments. Small businesses usually have long-term loans and short-term credit accounts with vendors. Each of these loans requires monthly payments. You are obligated to make these payments on a continual basis and this restricts free cash flow, which is money available to invest towards the growth of your business.

 

  • Growth

Along with debt management, a sturdy cash flow provides the comfort and capabilities that a business needs to grow. Strong cash flow management will help a business in acquiring new locations, conducting research and development, improving technology, acquiring more assets and much more. If your business manages to get itself in the position of having excess cash flow, it can do wonders for your business operations while also let you act in a proactive manner.

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This makes cash flow management fundamental to the overall functioning of your business and the supporting activities.

About the Author

Molly French

I have worked in many banks across the United Kingdom and have seen people make huge mistakes in mainly paying back debts. I'm here to help you keep your wealth bar above average.

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