You will face all sorts of financial concerns as a small business owner. Primarily, your main focus will be profits/losses. Effectively, you want to ensure that your business is actually making money rather than losing it. But, you can’t lose sight of something that’s equally important: cash flow.
Cash flow refers to the money entering and leaving your business at all times. You could make a profit, yet have a poor cash flow. It would mean you aren’t getting the money you’re making in time, so you have all these expenses and no money coming in for weeks or months. Every small business owner should care about cash flow because it impacts how your company runs. Here are three key reasons it should be one of your biggest priorities:
#1 Understand your ability to make payments
Essentially, cash flow lets you figure out if you can make payments. When you’ve got a positive cash flow with lots of money coming in, you are able to manage all the outgoing payments without any issues. Your bills are due, your suppliers need to be paid and you can handle all of this.
On the other hand, a negative cash flow can mean you don’t have enough money coming in at specific times to make these important payments. If you aren’t managing your flow of cash, you can very quickly fall behind on payments and put your business in debt.
#2 Chase up your debts
At the same time, cash flow helps you figure out if you have any debts that need chasing up. This is something you will learn when you actively start paying attention to cash flow. When you do some calculations, you find that you’ve made enough money to be in profit this month. However, when you actually look at your cash flow, you discover that you’ve not got anywhere near enough money coming in.
How is this possible? Well, your sales figures dictate your sales, but this doesn’t show if the money has come in or not. Sometimes, clients can withhold money or take a long time to pay you after you send invoices. Monitoring your cash flow lets you see if this is the case, so you can pursue business debt recovery. From here, you recover the cash you’re owed so the flow of money into your business improves.
#3 Influence future decisions
Business owners can use something called cash flow forecasting to predict future financial situations. Looking at your data, you can conclude that you should expect a certain amount of money to come in and a certain amount going out. You’re able to use this data to make predictions that influence your future decisions.
As an example, you can predict a lack of cash during a typically slow period of the year, meaning you focus more on saving money and cutting your overhead costs to reduce your outgoings over this period. Thus, you won’t be as negatively hit by the lack of money.
It’s normal to get tied up in the idea of profits & losses, but you still need to focus on managing your cash flow. As shown above, it has a huge impact on many aspects of your business and cannot be neglected.
