4 Reasons Why Your Business Must Have A Strong Cash Flow
Cash flow is one of the indications of how well your business is doing in the present, and how prepared it is for the future. It provides flexibility, security and greater peace of mind.
What is Cash Flow?
Cash flow is the calculation of the amounts of money flowing in and out of your business. An increased balance at the end of a given accounting period means you have positive cash flow.
Determining cash flow, however, is not the same as calculating income and expenditure. So what's the difference?
In terms of income, for example, cash flow does not include amounts that are owed to you but have not yet been received. These amounts will boost your recorded revenue, but don't improve your cash flow until you have them in hand.
You might purchase major assets that are recorded as expenses over the long term. Although these don't immediately affect your net income they do, however, have a direct and immediate impact on your business' cash flow.
The same applies to inventory. Although the related expenses do not show up until the stock is sold, the purchase of inventory ties up your cash and affects your cash flow right now.
Cash flow can improved by selling more, moving stock more quickly, shortening your customers' payment terms, extending your terms for paying suppliers, reducing costs, or taking external finance.
4 Reasons To Maintain Positive Cash Flow
1. Helps build a better business
You can feel secure about being able to meet your commitments, and keeping your business stable. A strong cash flow also boosts your buying power, and your ability to secure the best terms. And, if you are in a growth stage, it allows you to take on more debt when you are ready.
2. Gives you money to grow
Do you hope to extend or renovate your premises? Are you planning to invest in new technology, an expanded workforce, more assets and stock? Have you committed to staff development and training? A strong cash flow lets you take on these initiatives with more confidence.
3. You're ready to deal with the unexpected
You might not be able to problem-proof your business totally, but with a cash flow buffer, you can give it maximum protection against unforeseen events, such as loan defaults or foreclosures.
4. You can take advantage of opportunities
This is possibly the most important advantage. If you want to make additional purchases, attract investors, negotiate deals, or make offers to clients and stakeholders, positive cash flow places you in a better position.
Having the security of a healthy positive cash flow makes all of your key decisions easier.
With positive cash flow you take control.