The Importance of Cash Flow in The Business

What Is Cash Flow? Why Is it Important in The Business?
In this blog, you will understand cash flow and how important it is in the business.

Below is a simply a Info-graphic that explain cash flow.

Cash flow is the money that is moving (flowing) in and out of your business in a month. Although it does seem sometimes that cash flow only goes one way - out of the business - it does flow both ways.

•     Cash is coming in from customers or clients who are buying your products or services. If customers don't pay at the time of purchase, some of your cash flow is coming from collections of accounts receivable.

•     Cash is going out of your business in the form of payments for expenses, like rent or a mortgage, in monthly loan payments, and in payments for taxes and other accounts payable.

Why Cash Flow is So Important?

Lack of cash is one of the biggest reasons small businesses fail.

The Small Business Administration says that "inadequate cash reserves" are a top reason startups don't succeed. It's called "running out of money," and it will shut you down faster than anything else.

Starting a Business: Dealing with cash flow issues is most difficult when you are starting a business. You have many expenses and money is going out fast. And you may have no sales or customers who are paying you. You will need some other temporary sources of cash, like through a temporary line of credit, to get you going and on to a positive cash flow situation.

The first six months of a business is a crucial time for cash flow. If you don't have enough cash to carry you through this time, your chances for success aren't good. Suppliers often won't give credit to new businesses, and your customers may want to pay on credit, giving you a "cash crunch" to deal with.

Seasonal Business: Cash flow is particularly important for seasonal businesses - those that have a large fluctuation of business at different times of the year, like holiday businesses and summer businesses. Managing cash flow in this type of business is tricky, but it can be done, with diligence.

Cash Vs. Profit: It's possible for your business to make a profit, but have no cash. How can that happen? The short answer is that profit is an accounting concept, while cash, as noted above, is the amount in the business checking account. Profit doesn't pay the bills. You can have assets, like accounts receivable (money owed to you by customers) but if you can't collect on what's owed, you won't have cash.

Get to know the ways or tips on how manage your cash flow.

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Reference: The Balance SMB