Every business owner understands the importance of long term profitability combined with positive cash flow.
Without positive cash flow, it doesn’t matter how profitable a company might be – it’s going to struggle to meet its financial obligations.
Everything from paying suppliers and settling debts, to covering wages and returning money to shareholders. But it will also fail to consistently reinvest profits back into the business.
Managing cash flow allows the business to clearly monitor cost versus revenue and make sure there are sufficient liquid assets to pay for everything, while still making a profit.
Beyond mere survival, here are the key reasons why effective cash flow management is so vital:
✅ BETTER DECISION-MAKING
Cash flow management affords you clarity around what’s actually happening in your business – what you are spending your money on, when and why.
It’s much more powerful than relying on a P&L to gain the same kind of insights and start to make informed decisions about where you can cut costs.
✅ STRONGER BUSINESS RELATIONSHIPS
All businesses depend on the products and services of their partners and suppliers to some extent. And it doesn’t take much to devalue those relationships and in turn, to jepordise your own supply chains and ultimately the health of your own business.
Once a business relationship sours, especially through issues around invoicing an payments, reputational damage can be difficult to turn around and stricter payment terms can actually exacerbate the situation.
Setting payment schedules can help make sure that company finances are available to pay suppliers at the right time, but obviously requires some advanced planning.
✅ STRATEGIC SUPERIORITY
Change is a constant in business. And companies need a medium to long-term strategy in place, something which provides everyone with a clear direction of travel.
But without strong and positive cash flow, a business will be forever focused on the short-term outlook. Always fighting fires.
Access to an accurate cash flow statement allows you to understand the precise funds available at any one time. This is critical, since implementing long-term strategies will require periodic investments, which need to be affordable.
✅ GROWTH OPPORTUNITIES
Business expansion comes in several flavours. New markets, extra staff and additional revenue. But growing a business can place additional strain on cash flow, in order to fund the growth.
In other words, growth requires a lot of cash. Whether hiring more staff, buying in more stock, or increasing the size of your premises – all comes at a price.
There’s frequently a misconception that generating more sales will fix all the problems in a business. But without the right processes and cash flow management in place, things can quickly go wrong…