‘Cash is King’ – The importance of cash flow management
Cash flow is the essence of any business. With the current challenges facing businesses it is arguably more important than profitability at present.
Cash coming into your business ensures you can cover payments to employees and suppliers and meet other business costs. The stark reality is that a cash flow crisis which prevents a business from meeting these payments can lead to insolvency so cash flow management is crucial.
Managing business cash flow
Effective cash flow management enables you to forecast your future cash balances, to help ensure you have sufficient to pay your bills as they fall due, whilst also making sure you have enough cash in reserve to cover times when cash does not arrive as you would expect.
Cash flow forecasting is important because if a business runs out of cash and is not able to obtain new finance, it will become insolvent.
We often come across businesses where financial difficulties have arisen because cash forecasting processes are either inadequate or non-existent. Often, an immediate improvement can be seen by putting in place a cash flow forecast, which helps to highlight any pinch points where cash is tight.
Why a cash flow forecast is important?
- Identifies potential shortfalls in cash in advance. The cash flow forecast gives an early warning enabling the business to address the situation before it is too late.
- Ensures that the business can afford to pay suppliers and employees. Failure to pay suppliers could cause them to stop supplies.
- Spots problems with customer payments—preparing a forecast encourages the business to look at how quickly customers are paying their debts and address any issues as they arise.
- External stakeholders such as banks may require a regular forecast. If the business has a bank loan, the bank will want to look at the cash flow forecast regularly.
Properly managing your company’s cash flow properly is a critical part of running your business and, in the current climate, it is more important than ever.
Cash is ‘reality’
There is a well-known phrase ‘Turnover is vanity, profit is sanity but cash is reality’.
Of course, having a profitable business is important but it’s necessary to understand that profit does not mean the same as cash flow, and just looking at profit and loss statements will not give you the full picture.
Effective cash flow management requires consideration of cash flow pinch points, in addition to profit and loss numbers. Just because your business made a profit does not mean that the business has sufficient cash.
Invoicing a customer creates turnover, and if the costs and expenses are less than that turnover, there will be a profit, but it is actually collecting the monies due from that customer that creates cash in your business. If you want your business to increase profits and grow, you should aim to structure your business to have a positive cash flow.
Cash flow reflects your overall business state and a negative cash flow, even where a business is profitable can push a business into financial distress.
By putting a cash flow in place and tracking it, you will be better placed to manage risk to your business. Whilst you may not be able to control what is currently happening, with the challenges arising from the worldwide pandemic, you can control your actions and give your business the best chance of having a robust future.
If you need to help with working capital strategies, cash flow forecasting and management or sourcing funding get in touch.
How we can help
Our Business Recovery team is experienced in helping all types of business with cash flow issues from cash flow forecasting and management to sourcing funding.
It is essential that you act quickly, especially if you are facing a cash shortfall or shortage of funds. The quicker you act, the more options there will be available to your business. Contact us for advice email@example.com.
The information was correct at time of publishing but may now be out of date.