For businesses of any size, it is tempting to measure success as directly proportional to profit. We are all familiar with the notions of the bottom line and how final and all-important it is. And for many business owners –particularly small business owners just beginning to grow their revenue – it is tempting to get distracted by every sale and neglect cash flow. Cash flow is something quite distinct from profit, as well as something which often gets overlooked in favor of profit.
While overall profit is, of course, the figure that will make or break a business, a disordered cash flow is a sure way to see a business run into insurmountable problems before long. Defined as the money which is going in and out of business reckoned over a set period of time, a healthy cash flow allows for readily available funds to be used in aid of growing the business. Very often in business, access to funds is needed at moment’s notice, and so a bad cash flow could see your business coming up short just when funds are required most.
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What is Cash Flow?
A lack of funds, when required, is one of the main reasons why cash flow is vital to the continued success of a business. However, before covering some of the reasons why cash flow is so important, it is worth setting out in a little more detail just what cash flow is.
As mentioned, cash flow is defined as the money going in and out over a set period. But more than just this, cash flow also covers the available revenue at any one time. A company is said to have a good cash flow when the outgoing revenue never depletes available funds for too long, which can cause businesses to be strapped for cash when expenses (expected or otherwise) come along. If your business loses a significant amount of funds and does not recuperate them with incoming revenue in a timely fashion, then you have a cash flow problem.
To take an example, if revenue from sales brings in enough money to cover all expenses that occur before revenue comes in again, then the cash flow situation is looking good.
Why Is it Important?
Of course, it is fairly obvious why cash flow is important; if you don’t get it right, you’re not going to be able to manage your expenses. This can be a real risk for small businesses without large amounts of reserve capital. Accordingly, there are several services that exist for the specific purposes of helping small businesses with their cash flow. fastFACTR, a company offering invoice factoring for the purposes of improving cash flow, recommend that, as well as turning to such services, it’s important to employ a degree of diligence yourself in order to improve a company’s cash flow fortunes.
Another reason that cash flow is so important is that it allows you to plan for the future. Funds can be allocated towards new projects and growth strategies if you can rest assured that there will be enough cash, at all times, to meet all a company’s financial obligations. If cash flow is bad, then you will be unable to make extra investments, simply because money does not stretch enough to meet your current financial obligations and commitments. A bad cash flow will therefore stymie your company’s growth.
Ultimately, more revenue will lead to a better cash flow (simply because there will be more money available), but it would be a foolish move to simply focus on this and fail to actually manage your cash flow situation.