Is cash flow a worry for you?

Cash flow is the foundation of any healthy business. As the saying goes ‘cash is king’. Cash flow is also often referred to as working capital.

From a business perspective, a large inflow of revenue through sales looks good on paper, but your cash flow will always be your focus when growing or improving your business.

It’s possible for a business to continue short-term trading when it’s making a loss, and this is often the case when the business works on a delayed payment method. For example, invoices customers instead of requiring them to pay immediately. 

However, no business can survive in the long term if they’re unable to access secure, sustainable cash to meet their ongoing business needs.

If you’re looking to understand more about the importance of cash flow to your business, here’s everything you need to know.

Why can cash flow be more important than profit?

To quickly understand the importance of cash flow versus profit, let’s consider a new business or a business wanting to expand to another area.

The initial costs of setting up the business, such as purchasing a commercial property, financing equipment, employing staff, or investing in marketing, will always require access to cash before the business can expect regular turnover.

Compounding this need for working capital, even if a business manages to make profit from its first day of operation, there are many factors that can lead to a shortage of cash. For example, suppliers will request payment before customers settle their bills, and the money used for this needs to be available when required.

When a project takes many months, it’s not uncommon for a business to get paid in stages rather than in a single lump sum.

During this time, however, they will still have to pay for any operating expenses at the end of each month. It won’t make a difference how profitable a project is; if you can’t access cash at the end of the month to pay for your staff, your project – and business – may come to a grinding halt.

Below, we’ll look at why working capital is vital to the ongoing health of a business, and why every organisation should forecast their cash flow to ensure it doesn’t run out.

Looking for professional bookkeeping help to stay on top of your cash flow needs?

Top 4 reasons cash is critical for your business.

#1 – Flexibility

When a business has stable cash flow, it will have better flexibility in responding to emerging issues or when making critical decisions.

You can make important purchases easier in the short term without having to wait, and this is only possible if you have confidence in your business cash flow. Cash can be sent in the form of dividends to owners or shareholders, and when this happens, there is a stronger connection between the owners and the business.

Strong cash flow also helps maintain positive relationships with lenders – because your business looks more appealing, they can give you the option of borrowing if you want to take on new debt.

New buyers can also be attracted to the business by offering them favourable credit terms; you’ll have greater business flexibility if you are not desperate for cash.

#2 – To Keep Up With Debt

If you are borrowing money to buy equipment, property, or inventory, you are using projected future cash flow to justify these purchases.

You will need to have a stable future cash flow to pay the debt. In Australia, it’s common for businesses to have both short-term credit accounts and long-term loans with vendors. Both of these debts will need to regular repayments.

The business will also need to make these payments on an ongoing basis, which can restrict available funds and any money it may wish to put toward investing in the growth.

#3 – Impact on your reputation and credit rating

If a business is applying for a loan, they’ll always want to get the best interest rate possible to avoid paying a large amount of interest. If there’s no other option than to accept a loan with high interest rates, the business will need to ensure it can comfortably make repayments for the entire duration of the term.

When a business has unstable cash flow, there’s always a risk of missing payments or having repayments put undue hardship on the business. If this happens, there’s a risk of both damaging the credit rating of the business and its reputation with the lender.

This is one of the reasons your business needs professional bookkeeping. When a business has a strong, stable cash flow, it can not only get a better interest rate and feel comfortable with repayments, but it may eliminate the need for a loan entirely.

#4 – How Investors determine your business potential

Potential investors and analysts will look closely at business statements and figures when deciding on whether or not to invest in your business. These figures include:

• Revenue
• Operating cash flow
• Net income

These will demonstrate to an investor how stable a business is, whether it can support itself, and if there is potential for future growth.

For more information on managing cash flow, Xero has put together this handy guide.

Or, speak to a Biz First professional and get the support you need.

Author Bio: Angelica Hermann