Why Is Cash Flow Important For Small Businesses Anyway?

Open wallet with hundred dollar bills

Every small business owner worth their salt knows that keeping a constant eye on their cash flow is an important part of keeping their business running… What they may not know is that striking the balance between growth and sustainability is the key to business longevity.

Defining Negative and Positive Cash Flow

Cash flow in a small business refers to both sides of the sales equation:

  • Cash coming in from customers and clients who are purchasing the product or service you’re selling.
  • Cash leaving your business through monthly bills, such as rent payments, payroll, inventory, and payment of vendors.

The way that these two sides interact with one another determines whether or not you are dealing with a negative or positive cash flow. If you have more money coming in every month than you do leaving the business, you have a positive cash flow. The opposite is true if you have a negative cash flow.

Cash is King

When it comes to small business cash flow, having enough money to cover expenses is the best way to stay in business. While capital loans can come through in a pinch, it’s going to be impossible to pay your debt back without positive cash flow. In fact, 82% of small businesses that fail cite negative cash flow as the reason they closed their doors.

When considering your cash flow, you must also take into account your liquidity. This is anything that could immediately be turned into cash without losing any value. Examples of this would a company savings account that holds your cash reserves.

This liquidity allows you to cover short-term (typically less than 12 months) expenses. If your cash flow is not covering your obligations, you can liquidate assets to boost your cash flow. Accounting for any liquidity that you have can help you create a clear picture of your ability to cover expected and emergency expenses.

Surviving Seasonality with Scalability

Many businesses have the misconception that increasing sales is going to solve their cash flow issues. A huge growth in sales presents its own set of problems. It might seem that bringing in a lot of accounts payable all at once is a good thing, but buying inventory, getting customers to pay their invoices, and bringing in additional employees to handle the boom is going to cost a lot of money upfront.

Seasonality, in which a particular event, holiday, or time of the year causes your business to fluctuate in sales, is particularly hard to manage, especially when a business is just starting off.

A two month late invoice means two months where your cash is tied up in paying for your client’s order. That’s money you don’t have to keep the lights on or your rent current.

How can small business cash flow survive the lean times?

Micromanage your spending. Every dollar that is leaving your business is taking away from an already thin profit margin. Know where every penny in your business is going and cut costs where you can. Avoid relying on short term loans, and begin to build up cash reserves to help you survive when business is slow.

Additionally, analyze your cash flow over a few months.

Are there clients who are constantly a month behind? Account for that in your cash flow statement.

Are the summer months going to cost you more in cooling costs? Account for that in your cash flow statement.

While managing your cash flow is not a perfect science, you can begin to see patterns emerge that help you better plan for the ups and downs of being a small business owner.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *