Cash flow is a key component in understanding how your business is progressing financially. As a term that refers to how much money a business is earning and how much it is spending, it is crucial to monitor cash flow to help your SME succeed. Cash flow differs to profit, and if you focus too much on profit, as opposed to cash flow, then your small business may end up bumping into problems such as over-ordering stock and overspending. See below for some more information on why it’s so important to prioritise cash flow as a small business.
1) Forecast financial obstacles and make better business decisions
When you keep cash flow at the forefront of your business planning, you can see whether your business will have the correct money to pay suppliers, bills and invoices. Being accurately aware of the cash flow status of your business at all times ensures that only informed and sensible business decisions are made.
2) Planning will help business relationships
If your small business keeps on top of its cash flow through consistent planning, then it should help you maintain positive relationships with other companies that you an involved with financially. This is because meticulous cash flow organisation means you shouldn’t end up not being able to pay suppliers or other invoices. Making consistent payments will boost your reputation, too.
3) Manage your working capital
Prioritising cash flow as a small business means you can better manage your working capital. Focusing on cash flow will assist in getting a good idea of your current operating liabilities, and current operating assets. This will help greatly with your business’s financial health.
4) Allow for business growth at the right time
Every business wants to expand, it’s what it’s all about, right? However, focusing on things like profit over cash flow might result in unexpected problems in the long term. Growth requires cash for everything it entails, including buying stock, hiring employees, renting business space and appropriate equipment. If you invest in growth before you have enough money coming in, and likewise when you don’t actually have the right amount of cash to flow out, there will be trouble ahead.