It does not matter how much money your business is generating; if your cash is tied up in the business and you cannot pay the bills, you are doomed. Cash enters the business when customers pay their invoices. Cash flows back out again when you buy stock, pay bills and make debt repayments. Poor cash flow is one of the main reasons why businesses fail. Once creditors start lining up for their money and there is no money left in the current account, you know you are in trouble.
Smart financial planning is essential when you are running a business. The more cash you have, the more protection you have against unexpected problems or bills. However, having money in the bank is good, but you also need to be proficient at generating more income. Cash needs to continue flowing through the business on a continuous basis.
Cash flow problems don’t just affect your business. They can have a knock-on effect on your suppliers, too. When cash flow dries up, a business will prioritize the most important creditors and settle their bills first. Small suppliers tend to be pushed to the back of the queue.
Greater Flexibility
Healthy cash flow affords the business greater flexibility. When you have cash in the bank and a booming order book, you won’t be too concerned if a client leaves you with a bad debt or the landlord hikes the rent on your office. A strong cash position gives you the freedom to make purchase decisions or distribute dividends. It also puts you in a stronger position if you need to borrow money to grow the business.
Favorable Credit Terms
Lenders look at a business’s cash flow when deciding whether to offer you favorable credit terms. If your cash flow is unhealthy and you don’t have much in the way of cash reserves, a lender will think twice about extending any more credit in your direction. You will be seen as a high-risk proposition. If the lender does offer you a loan, don’t expect the borrowing terms to be competitive.
Growing the Business
You can’t grow a business if you have less money coming in than money going out. When the cupboards are bare, there is no money in the pot to pay for staff training, new stock, larger premises, or a new IT system. In the short term, this will be restrictive, but if the situation continues, the business will struggle to move forward in an increasingly competitive global marketplace.
Good cash flow will help your business hit its strategic goals and move forward in a proactive way. Businesses that stand still are left behind, so if you want to run a successful business you must ensure your cash flow remains healthy at all times.
Staying in Control of Business Cash Flow
Cash flow needs to be carefully controlled at all times. This can be done by careful management of the business’s finances. Make sure you have robust credit control procedures in place and don’t buy too much stock at any one time. The more money you have tied up, the less available cash there is.
Accurate financial reporting is the best way to monitor cash flow in the business. A simple cash flow statement organizes where your cash comes from and how it is being spent within the business. A positive balance is good, but a negative balance is cause for alarm.
Make Use of Accountancy Software
Most good accounting software packages are capable of producing cash flow statements to help you see your current position, but if you want to stay on top of your business finances, it is sensible to produce cash flow projections on a regular basis.
Producing Cash Flow Projection Forecasts
Cash flow projections can help a business plan for future events. Say, for example, you know you have a large insurance premium payment due next month. By accounting for this in your cash flow projection, you will see how the extra payment affects the company’s cash position. You can also use a cash flow projection to check whether the company is in a healthy enough position to be able to pay out dividends to directors or shareholders.
If you have too much cash, this also needs to be managed. Maintaining a healthy cash account is good, but it is sensible to make your cash work harder for the business by transferring it into a deposit or investment account where it can earn interest.
