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Why Cash Flow Is Vital for SMBs

March 30, 2022
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You’ve probably heard the phrase that cash is king. However, as a small business owner, you might not realize all the ways in which cash can impact your organization for the long haul. Without cash, your business may struggle to purchase supplies, pay worker salaries, and even keep the lights on. If you want your business to stay profitable, careful cash flow management is vital.

What Is Cash Flow?

Understanding the meaning of cash flow is crucial to recognizing the important role it plays in your small business’ success. A measure of the net cash and cash equivalents entering and exiting a business, cash flow reflects the business’ financial health while letting decision makers know how much money is available for use. Cash flow can be positive, meaning there’s more money coming than going, or negative, indicating more money is leaving the business than coming in. Along with suggesting that a business is struggling, negative cash flow can make it hard for companies to pay the bills and take advantage of expansion opportunities as they crop up. Keep reading to learn more about why cash flow matters and find out what steps you can take to keep money in your company coiffers.

Importance of Cash Flow for Small Businesses

Cash flow makes running a business easier. After all, profits aren’t always indicative of health, and positive cash flow means your business can take the steps it needs to survive and thrive. Here are some reasons that cash flow is crucial for SMBs.

Maintain Supplier Relationships

It’s hard to keep up strong relationships if you can’t pay your bills. Without cash flow, your small business may struggle to cover debts to suppliers, pay staff for their hard work, and even make rent or mortgage payments. The end result is that your business’ reputation can suffer in the community. Additionally, cash flow issues can cost your business more money in the long run. Without sufficient cash in your coiffers, you’ll likely have to make purchases on credit. As a result, you may not have the negotiating power to get the same trade terms you would if you were able to pay upfront.

Keep Your Doors Open During Downturns

Along with giving you a competitive edge in negotiations, cash flow can help your business stay open during times of economic strife. After all, even the most successful businesses sometimes go through lean periods, a fact that business owners who survived the pandemic know all too well. When you have cash in the bank, you can rest assured knowing you don’t have to panic and close up shop during less profitable months.

Jump on New Opportunities

You can hardly plan for the future if you don’t know how much cash will be available tomorrow or the day after. Along with letting you pay the bills without stress, positive cash flow enables you to take steps toward growth and expansion. For example, you may want to expand your product and service offerings, hire additional workers, or even open a new facility to capitalize on a new market or situation. By managing your cash flow with care, you’ll be better able to determine when the time is right to grow.

Prepare Your Business for the Future

Even if you can’t imagine someone else running your business right now, the day may come when you want to move on to other ventures. Under those circumstances, prospective buyers will want to know that your company is generating sufficient cash flow. Similarly, if you’re looking to expand, investors will be interested in the amount of cash coming in each month. By improving your cash flow now, you can help prepare your business for future success.

How Cash Flow Forecasting Can Help

With cash flow forecasting, you can see the effect of cash flow from any area of your operation — from sales to workforce, loans, and capital asset plans.Cash flow forecasting can shine a bright light on existing or potential problems for your company. For example, it might show you that your company is more likely to have cash flow problems during a particular quarter or month. You can use the information to make adjustments to spending to improve cash flow and keep your company from sinking into the red during slow periods.

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Steps to Improve Cash Flow

The good news is there are steps you can take to turn negative cash flow around. Here are some ways to increase the amount of cash coming in the door so your business can achieve its goals moving forward.

Keep Up With Cash Flow Statements

If you don’t have a solid understanding of the money entering and leaving your business, it’s hard to know where changes are necessary. One of the best ways to analyze cash flow is to prepare cash flow statements on a regular basis. Doing this ensures you’ll have the most up to date information when it comes time to make decisions.

Make It Easy for Clients to Pay

The last thing you want to do is make it harder for customers to pay their bills. To minimize the odds of customers paying late (or not paying at all), look for ways to make the payment process less of a hassle. For example, creating an online payment system will allow customers to settle their debts without having to write a check or send in a paper bill. You can even send invoices with a prominently displayed button inviting them to “Pay Now.” If you’re still having trouble with cash flow, you may want to consider levying late fees on those who don’t get their payments in by the due date. Doing this will reduce late payments and keep cash flow on the positive side.

Engage in Cash Flow Forecasting

Cash flow forecasting is one of the best ways to assess your business’ financial future. A measure of cash in and cash out for a set length of time, a cash flow forecast helps companies avoid shortages and debt. By getting a cash flow forecast now, you can increase the amount of money coming into your business and start making plans for future growth.

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