Cash Flow – Why Is It So Important?
Cash Flow is the money that flows in and out of your business, more cash coming in than going out is positive, having more money going out than coming in is negative. Depending on the type of business you run your cash flow can go from one to the other, especially if you have a seasonal business so making sure you are prepared is essential to the wellbeing of your business.
Why is Cash Flow So Important
For any business to survive, it must be able to meet its commitments on time without being overstretched. If your cash flow is constantly negative then the chances are that your business is on its last legs, that said most businesses dip into negative cash flow from time to time – the key is being prepared and managing it. If you are aware of how your liquidity fluctuates you will
- See where you are spending money
- Protect your working relationships
- Be able to plan more effectively
- Know when to grow your business
- Be able to meet your commitments
The Benefits of a Positive Cash Flow
Whilst cash flow may change, on balance you need it to be positive. You will be able to react more quickly to opportunities – for example stock up before a forthcoming price rise, take advantage of changing business conditions, be prepared for a downturn.
A positive cash flow is also an indication to your Bank or potential Investors that you are capable of thinking ahead, it demonstrates business stability and makes you less of a risk and more of an investment.
How Can You Improve Cash Flow
Most importantly you need to know your business numbers. A good solid bookkeeping system, preferably operated by a well qualified bookkeeper will ensure you know exactly where you are at any moment in time and provide reliable forecasts for the future. Even if you don’t have a full time bookkeeper, you can employ a Bookkeeping service , they will often have a broader experience and be able to offer good advice.
Keep an eye on your stock – anything that has been hanging around should be moved on. Money that is tied up is not working for you. Invest it in stock that moves, keeping your customers happy.
If your business is based on services rather than goods, schedule payments and obtain a deposit. It is a sad but true fact that people are less likely to pay on time for services than they are for physical goods and you need to protect yourself.
Stick to your terms of payment, especially where larger businesses are concerned.
If your business is seasonal look to see how you can even out business spikes both in terms of income and expenditure. It will make you less vulnerable.
Manage surplus cash, if you can make it work for you rather than just sit in the bank – do it
Make sure your bookkeeper prepares a cash flow forecast and budget and make sure you stick to it. Keep it updated, things change and this can help you be prepared.
If you manage your cash and liquid assets properly it will give your business a level of stability that many would envy and allow you to weather ups and downs in the economy.
If you would like further information on the benefits of a well managed cash flow why not book a free consultation – we will be happy to help.