In many ways, a startup’s cash flow is everything. You can have the best idea, products, and forecasts in the world, but none of them are useful if you don’t have the cash flow.
More than 80% of businesses fail due to a lack of cash flow – it’s among the most critical factors in your company’s success or failure, so managing it is a skill worth learning. So, why does cash flow matter?
1. Make Better Plans and Decisions
A cash flow statement can accurately determine your money at any given time. This is critical because accurate data must back up any plans or decisions.
For example, deciding between a physical and virtual office, which one is more economical. Virtual office address London offers registered office addresses that tend to be more frugal and additional features, such as call handling, meeting rooms, and mail forwarding; there are plenty of reasons to make your mark in the capital.
Significantly, if you do not carefully manage your cash flow, you may make poor decisions that may endanger your business.
2. Liquidity
Businesses strive to provide greater financial returns than the interest earned by simply depositing money in a bank. They can also accumulate an excessive amount of cash. Because cash does not earn anything, holding too much cash may result in earnings losses.
The company’s liquidity position is referred to as the cash situation. An asset is more closely related to cash the more liquid it is. It is possible to turn liquid assets into cash quickly.
Liquid assets include stocks and bank deposits that you can quickly sell. The least valuable and liquid assets are buildings.
Cash flow is always important, but it becomes even more critical when getting credit is difficult. When the economy is struggling, financial institutions are reluctant to make loans.
As interest rates increase, borrowing becomes more expensive to balance the risk of loan default.
3. Expand at the Right Time
It’s exciting to see your company grow and expand. It implies new employees, new markets, and increased revenue. But first, a word of caution. If you expand at the wrong time or in the wrong way, you’ll have more problems in the long run.
Growth necessitates a substantial investment. Before the money starts, you must buy stock, hire employees, rent a building, and buy computers. You will have problems if you don’t have the funds to match your growth. However, you’ll know when the time is suitable if you manage your cash flow effectively.
Cash flow is critical for businesses of all sizes, including tiny ones. According to one study, 82% of businesses fail due to cash flow issues. Act with the right tools to ensure you are not one of them.
4. Keeping Up with Debt
Borrowing money to buy buildings, equipment, and inventory means using future cash flow to make purchases. To pay off your debt, you must have positive future cash flow. Long-term loans and short-term credit accounts with vendors are standard for businesses. Monthly payments are required for each loan. The requirement to make these payments on an ongoing basis reduces your free cash flow, which is money available to invest in the growth of your business.
5. Manage Your Cash Flow
According to your cash flow statements, you may need to cut expenses or increase the amount of money coming in. According to Entrepreneur magazine,improving receivables collections by offering discounts or dropping habitual late-paying customers can help you maintain a healthy cash flow.
Examine your cash flow statements months in advance to identify potential problems and ensure you have enough cash on hand or credit available to pay your bills.
6. Protect Business Relationships
If you’re experiencing cash flow issues, you might be unable to pay your suppliers. This can harm your business relationship with them and your overall reputation.
Set payment schedules to ensure you have enough funds to pay suppliers. You must plan so that you are not confronted with multiple invoices or bills simultaneously without the funds to deal with them.
7. Surviving Lean Months
We know there can be a time lag between sales and payment. But because you haven’t collected the amount, the bills aren’t going to vanish or change their due dates.
You must have enough cash to get you through the lean months when the flow is not there. Good cash flow management necessitates professional training, accurate information, and sound management decisions.
8. “Profitable” Businesses Can Go Bankrupt
It’s critical to understand the difference between cash flow and profit. Just because you’ve received a large number of orders does not mean you’ll be able to pay your bills. For example, you could sell customers $100,000 products on credit with 60-day terms. However, you may have ordered $70,000 in supplies to make those products, and you must pay your suppliers within 30 days.
If you have $50,000 in rent, insurance, phones, payroll, interest payments, and other expenses due in less than 60 days, you will no longer be able to pay your bills (unless you have cash reserves of credit lines). Even if you can eventually pay your bills by requesting more time from your creditors, poor cash flow may result in losing vendors, lenders, and suppliers, which can severely harm your business. Small business owners require a cash flow management system for this reason.
Bottomline
Keeping track of your company’s cash flow is not difficult. Tools and solutions are available to help you manage your entire financial picture and make better, more informed business decisions.
