Small business owners have a lot of things to worry about on a daily basis, but many of them don’t realize the importance of really keeping track of their cash flow. In fact, if there’s one thing that you should be doing more of as a small business owner, it’s maintaining adequate cash flow, as ignoring your cash flow could actually result in the failure of your organization. Continue reading to learn more about why ignoring cash flow could be so detrimental to your company, and why it’s imperative that you incorporate this task into your daily accounting strategy.
Without Cash, You Can’t Do Business
Put simply, if you don’t have enough cash on hand, you won’t have any money available to reinvest in your business to help it grow. This means that you won’t be able to make large investments, but it also means that you won’t even be able to make small everyday purchases that keep your employees organized, efficient, and effective. Everything from equipment purchases for your office, to basic supplies like paper and folders, require that your business has enough cash on hand. However, when customers don’t pay on time or they don’t pay in full, your business can quickly become deficient of cash, and you’ll need to employ services like invoice financing in order to get the cash flow that you need right away until all of your invoices are paid in full.
The Statistics That Prove the Importance of Managing Cash Flow
A lot of business owners, especially small business owners, don’t realize that the ability to manage cash flow is actually a determining factor in whether or not their company succeeds. Statistics prove that as much as half of all businesses fail, and, in a lot of cases, businesses are often profitable when they fail. It is just that they close their operations down because they exhibit poor cash flow management. This is because cash flow management has a rippling effect throughout the organization, and that effect can be a positive one or a negative one that compounds. The only way to ensure that the ripple effect will be a beneficial one is by properly managing cash flow and ensuring that your organization always has enough cash on hand to pay suppliers, meet payroll, and cover any unexpected expenses as well.
You May End Up Spending Money Where You Shouldn’t Be Spending It
Imagine that you’re in need of a new piece of equipment, whether that’s for your office or for your manufacturing facility. You decide that you’ll put a down payment on a machine that you need, but you don’t consider your cash flow because you haven’t been keeping track of it properly and you haven’t hired anyone else to do so either. After you make the down payment on the equipment, however, you quickly realize that you should have actually spent that money on payroll that week instead because you do not have enough money on hand to pay your employees now.
This one mistake has a ripple effect, as mentioned above, throughout your entire organization. Some employees, such as your delivery driver, end up quitting because they are not willing to work without getting paid on time. So you have to now shift your focus to hiring new employees to fill these voids. At the same time, you have to figure out how you will pay those new employees. And because you are frantically trying to get your staff back, you are too distracted to focus on your accounts receivable, and you fail to collect that money on time. Ultimately, the problems continue to escalate until you end up having to either take out a large loan, thereby putting yourself in further debt, or shut down completely.
This entire scenario could happen to anyone, but it could also be avoided simply by following your cash flow. With cash flow analysis, you will know exactly when it’s safe to make an investment and when you need to hold off until you have more money on hand.
As you can see, there are a variety of reasons why ignoring cash flow could actually kill your small business. To avoid problems before they take root, simply have a qualified and talented accounting staff on hand every day to track everything from expense receipts and accounts receivable. Also consider incorporating tools like invoice financing to ensure that you always have cash on hand even when customers are not paying their invoices in full or on time.
