What Is Cash Flow and Why Is It Important?

Running a business without a budget or cash flow forecast is like trying to drive somewhere you have never been without a map or GPS. Yes, you might be possibly driving in the right overall direction. However, without further directions, it will be very challenging to arrive at the desired location. This post will cover the importance of cash flow for your business and why you should forecast it.

Cash is the essential factor of a business. Regardless of the reason, you went into business, ultimately, making money is the goal. Unless you carefully control it, cash flow is the one single element that can take your company down.

What is Cash Flow?

Cash flow is the money that is flowing in and out of your business. When positive, it means that you have more money coming into the bank than leaving at that specific time. Conversely, when negative, it means exactly the opposite; more money leaving than coming in.

It is a simple concept. But in practice, many business owners struggle with it.

Why Is Cash Flow Important?

The reason cash flow is so important for a business is because, in a matter of days, it can fluctuate drastically. And it does not take long for a company to be pushed out of business because of a money shortage.

Simply because your schedule is booked, and you have been working non-stop, it does not mean money in the bank. Profitability does not equal cash flow.

Your business might be profiting every month, but your cash flow could be negative. But how?

A company with a large portion of its revenue tied up in account receivables that need to be collected. In such a case, while the sales might be high, the income statement does not always reflect its cash activity.

Forecasting

Building a cash flow forecast is crucial. It will assist you in navigating on a month-to-month basis and understanding your limits.

Keep in mind that every month you have bills, payroll, utilities, insurance, amid other components that keep the wheels of your business going. The forecast helps you to see what is coming your way in the near future. And you can make appropriate changes if necessary.

The cash flow forecast goes hand-in-hand with your budget. Thus, it is crucial to have at least a 12-month budget along with a cash flow forecast.

How Can You Improve Your Cash Flow?

Considering the importance of cash flow, the next question you might be asking is, how can you improve it? There are many ways that your cash flow can be improved.

With a solid forecast and a budget, you should have a clear idea of where you are spending your money. With this intelligence, you can now attempt to find ways to improve your cash flow.

Consider Your Spending

Analyze your spending. Are all your expenses essential for your operations?

When I first started my business, I rented a building with an office and storage area in South Carolina. Because most of the year was fairly warm, I decided not to have the gas for the furnace turned on. That saved me over $400 a year.

While that might not seem much for a business, the little choices add up to a larger amount. Controlling your spending is a fast way to see your capital flow increase.

Invoicing

No clients will pay until they are invoiced. Do not wait a week or two to invoice, as soon as the work is done, send it.

Also, keep track of the due dates. When clients don’t pay on time, be sure to place a call to remind them that they have an outstanding amount.

Build a Rapport With Your Suppliers

Nourish a friendly relationship with your suppliers. Regular communication can lead to better chances of landing more advantageous terms with them.

Try to convince them to give you a better deal. Also, you can ask for discounts on early payments. Those are all great ways to save money in the front-end.

Conclusion

Your company’s cash flow is crucial because it determines whether you will stay in business or not. Therefore, understanding and predicting it will increase the odds of survival.

While budgeting and forecasting is an essential task, there are things you can do to help manage the flow of money. Finding ways to cut costs, invoicing quickly, and networking with suppliers are just some ideas that can be easily done.