What is Business Cash Flow and Why Is It Important?

“Cash is King”

Cash flow is the movement of money in and out of your business each month. While many businesses tend to focus on turnover as the key driver of business success, entrepreneurs across the world have had to find out the hard way that inevitably, cash is king. No matter what your turnover is, if your cash flow is negative, you don’t stand a chance. 82% of small businesses fail each year due to poor cash flow management, so it is important to be proactive, rather than reactive, when it comes to managing your business cash flow. You’re reading this article, so that’s a good start.

Why is cash flow important?

While this may seem like a rather basic question to some, it is amazing just how many business owners forget its importance. From missing utility payments, to not being able to repay debts, cash flow is the difference between success and failure.

Managing Bills & Expenses

Poor cash flow management can result in your business not being able to pay for monthly operating expenses such as employee wages and rent payments, which can have a significant impact on the service or product that your customers expect, and the livelihood of your employees.

“The Rainy-Day Fund”

Like the age old saying in football, “you are most vulnerable just after scoring a goal”, the same holds true for having a positive cash flow. It is easy to believe that when cash is in the bank your business is in a secure financial position. However, as we’ve seen with the recent outbreak of the coronavirus, it is impossible to anticipate when these events will occur. Just as you should have a savings account for your personal finances, the same holds true for business finances.You just never know when you may need access to a rainy-day fund to keep your business afloat.

Seasonal businesses

Cash flow is a particularly important factor for seasonal businesses who will experience a steady income stream through certain months of the year, but next to nothing in other periods. This must be taken into account when putting together a cash flow forecast to anticipate periods of reduced demand, as your fixed costs will remain.

Credit Score

Poor cash flow management could lead to the company becoming liquidated, which can affect both your business and personal credit score, making it more difficult to access finance in the future.

Accessing Business Finance

If your business is struggling to sustain a positive cash flow, you will have to demonstrate to the lender through other means that your business will be able to repay. For example, poor cash flow may be offset by a profit-making trading history over previous years.

Take care of the pennies and the pounds will take care of themselves'

How does cash flow work?

Cash flow is relatively simply to work out. It requires that you can pinpoint all the monthly/quarterly/yearly operational expenses that your business currently has, in order to understand the total monthly outgoings each month. This will give you a good indication of the amount of sales that you need to make each month to cover the cost of expenditure – your breakeven point. If you cannot at least cover your costs, what chance do you have of survival?

Income will include all sales made during the month from your business’s products or services. It is useful to separate each service or product you offer so that you can optimise where your business focuses its sales and marketing efforts.

How do I create a cash flow forecast?

The simplest way to create a cash flow forecast is to use an Excel spreadsheet or a Google Sheet so that you can automate calculations using formulas. To give you a head start, we have put together a FREE cash flow forecast template for you to try in Excel with a simple explanation on how to use it, along with an example.

When you are finished putting together your cash flow forecast, ensure that you show it to a finance professional before using it to inform financial decisions. And remember, always back your figures up with third party evidence. The last thing you need is your accountant or finance manager asking for lost receipts.

What can I use a cash flow forecast for?

A cash flow forecast is a sense check on just how many sales you need to make to cover your costs first and foremost. However, there are a variety of potential applications for a cashflow forecast. If done successfully, a cash flow forecast can be used to make more informed financial decisions and test different scenarios. What would the impact on our cash flow be if we hired another member of staff? Can we afford to take out a business loan? Too many businesses commit to business decisions without fully understanding the financial health of their business beforehand.

How to manage business cash flow

  • Monitor your cash flow regularly – be proactive not reactive!
  • Cut unnecessary costs.
  • Stay on top of invoicing.
  • Shorter payment terms for customers paying on credit.
  • Account for other debt.
  • Anticipate shortfalls in cash.
  • In times of need, prioritise expenses - pay biggest suppliers first!

If you think that your business needs a cash injection to change its trajectory, it is best to speak with a professional beforehand so that they can understand your needs. Commercial Finance Brokers exist to service the funding needs of business and do the searching for you – leaving you to do what you do best. Start your search for finance here.

Final Thoughts

The key factor determining the success or failure of your business is cash flow. Profits become meaningless if the lifeblood of your business is not flowing sufficiently enough to at least cover your monthly expenditure. It is easy to believe that cash flow is a “small business problem”. But don’t be mistaken, cash flow failure is prominent across organisations of all sizes. We have taken the liberty of attaching links to some articles below that highlight just how important cash flow is. They’re an eye-opener.

 “The Collapse of Jamie’s Italian”
https://giftarticle.ft.com/giftarticle/actions/redeem/f105216e-ed85-4384-8a28-b9ca42568034
“UK’s second-biggest construction group liquidated”

https://giftarticle.ft.com/giftarticle/actions/redeem/3e65ccd0-8213-4d89-992c-31461017c5c8

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