Home Finance 5 Reasons Why Cash Flow Is Important to a Small Business

5 Reasons Why Cash Flow Is Important to a Small Business

5 Reasons Why Cash Flow Is Important to a Small Business
Photo by Firmbee.com on Unsplash

Many small businesses struggle to keep their doors open because they overlook one important thing: cash flow. It is crucial to learn how to manage cash flow for a small business. Cash flow is the lifeline of every business.

Without proper management and forecasting, you may find that you don’t have enough cash to help your business grow and thrive.

Here are five reasons why cash flow is important for a small business.

1. Know You Can Pay Your Bills

Using cash flow software for small businesses can properly manage your cash flow and ensure you have enough money to pay your bills.

Creating cash flow forecasts helps you estimate how much cash you’ll have in the near future. Predicting your cash flow allows you to take action now to ensure that you have enough money to pay your suppliers, invoices, and other bills and expenses.

2. Understand Your Working Capital

Cash flow planning helps you understand your working capital now and in the future. Many cash flow apps for small businesses can simplify and streamline this process.

When you understand your working capital, you can make better decisions for your business.

  • Is now the right time to hire?
  • Should you invest in that new piece of equipment?
  • Should you cut back on expenses to increase your working capital?

Cash flow planning and forecasting can help you answer these questions to make smarter decisions for your business.

Without cash flow monitoring and management, it becomes riskier to make some decisions. Let’s say that you want to invest in new equipment for your business. You assume you have enough cash on hand to cover the expense because your invoices tell you so. But some customers still haven’t paid their bills, so you really don’t have the amount of cash you thought you had.

Had you used a cash flow planning tool, you would have known that you didn’t have enough cash to make the purchase. You also would have known that the late-paying customer is a repeat offender and could have taken steps to encourage them to pay sooner.

3. Stop Overspending

Cash flow helps you understand:

  • How much cash is coming into your business
  • How much money is flowing out of your business

Like a personal budget, it’s essential to understand how much your business is spending on operations and other expenses.

Unless you’re actively monitoring and managing your cash flow, it will be difficult to determine whether you’re overspending. Cash flow allows you to better understand your expenses and cut back on non-essentials to ensure that you’re not spending more than you’re bringing in.

4. Grow Your Business

Cash flow plays a crucial role in a company’s growth. Understanding your cash flow empowers you to:

  • Make investments or equipment purchases at the right times
  • Understand which customers are paying on time
  • Decide whether it’s the right time to bring in new staff members
busines growth
Image by Gerd Altmann from Pixabay

Cash flow forecasting and projections allow you to predict your cash flow in the future – weeks, months, and years from now. Doing so will help you make decisions now that can spur growth in the future.

Many cash flow management platforms and apps allow you to create what-if scenarios. With scenarios, you can see the potential outcome of a decision and how it may potentially affect your cash flow.

With regularly updated cash flow forecasts, you can:

  • Free up more cash to invest in new products or equipment
  • Take action now to overcome bumps and challenges that make your cash flow inconsistent
  • Plan for tax payments

Each of these steps can help you grow your business and improve the sustainability of your operations.

5. Accommodate Seasonal Sales or Trends Easily

Virtually every business goes through slow periods. Sometimes, these slow periods are predictable and consistent. Other times, they pop up unexpectedly.

With proper cash flow forecasting, you can estimate when you’ll have slow periods and take steps now to weather these storms.

Scenarios can also help in this area. Simply input your seasonal revenue into your projections and plan them into your budget.

Cash flow is an indicator of your company’s financial health. If you’re not creating cash flow statements, forecasts, and projections, you’ll have no way of knowing whether your business has enough money to cover its expenses or if it’s the right time to invest in your business.

Featured Photo by Firmbee.com on Unsplash