Cash flow is an extremely important and key driver that plays a critical role in the success of any business. But did you know that even a profitable business can still fail if the cash flow is not handled correctly. That is a very real fact and sadly a hurdle where many businesses have failed.
Well, let’s look at it in the simplest form. Suppose your business, despite having plenty of work booked or sales in the pipeline, runs out of money. Where does that leave you? If you don’t have enough to pay your suppliers or lenders then your business will find itself in some serious trouble. Your overheads will still have to be paid, any loans against the business will require payment and your suppliers might not be willing to be overly patient for their payments – after all they need to be cash positive too.
This is why it is important to learn about cash flow, its effect on your business and how to manage it. So, let’s take a closer look at how it all works.
What is Cash Flow?
Cash flow is simply the money incoming in terms of revenue and outgoings as expenses. If you properly manage the cash flow then your monetary condition will always stay apt to pay your expenses. Think about it like this, if you have more incoming revenue, than outgoing debt, your business will be cash flow positive.
Why Do Businesses Run Out of Cash?
Quite simply, your business has more expenses than the revenue it generates. If this goes on for longer than your threshold time limit, your business will run out of cash. There are no complicated formulas here, it’s all down to incoming vs outgoing.
Your business does risk the problem of running out of money if you do not manage your cash flow properly. It is quite uncommon that businesses with good financial management do not have enough money. But every business needs to be prepared for a change in circumstances where it can happen, and then what you need to factor in is time. How much time do you have to resolve the issue you are faced with until then money dries up? It might generally be around 6 months.
You should also keep in mind that your business isn’t always going to run out of money simply because it’s a tough phase. It can also happen when your business is expanding too fast.
How Much Time Is Needed to Fix Cash Flow Problems?
In most cash flow issue cases, it is usually safe to have at least six months on hand. Therefore, if you are even remotely aware of the future cash flow issue, then you shouldn’t wait any longer. You need to start working to solve the issue as soon as possible. Action now will save a lot of pain later.
Benefits of Good Cash Flow Management
Apart from the fact that your business will not run out of cash – managing your cash flow properly – by focusing on the future has many more benefits. For example, your business will be in a much better monetary position and have better growth plans. It will enable you to have cash on hand to buy new equipment or add to your team.
Another benefit is that you’ll always stay aware about any outstanding debtors, requirement of funding, or even the need to expand the business, whether you are required to plan or pivot. The funds will be there.
One more benefit of managing cash flow is that when time gets tough, like we have experienced this year, you will easily find a way to steer your business through it.
Is Cash Flow More Important for a Business Than Profit?
No, however, managing cash flow properly is crucial and needs to be focused on. Why? Because even if your business is making a good amount of profit, it can still run out of cash if the cash flow is not managed properly.
But why does this happen? Well, usually it happens in your business if there’s a delay between raising the invoices and getting payments. It means that your working capital is burning out because your cash flow cycle is not effective. A great reason to always ensure you have the best financial advice for your business.
Ainsworth Accounting Solutions are here to help you with any of your business accounting needs and we’d be happy to speak with you. Simply contact us today to take the next step to a better financial future!