Why Is Cash Flow Important: 3 Major Reasons
There can be lots to consider when it comes to your accounting processes for your business. And for your business to be as healthy and profitable as possible, you need to keep an eye on your cash flow statement. Knowing where your business stands in regards to cash flow can allow you to make better business decisions over a period of time.
So, why is cash flow important? Is there a difference between cash flow and profit? There can be some varying reasons depending on the type of business that you operate and the industry that you are in. But regardless of your business type, cash flow is a fundamental aspect of your business being successful. Just like your accounts receivable, business expenses and accounts payable.
Here is everything you need to know about cash flow and why it’s important for your business.
Here’s What We’ll Cover:
What Is Cash Flow?
Think of a water tank. More water gets added at the top and then ultimately drains out of the bottom. So, to keep your water tank as full as possible you’re going to want to have more water that comes in then goes out.
Cash flow works in the same way. It’s the money that flows in and out of your small business. Having a positive cash flow in your business will mean that you have more money coming in than going out. And this is a good thing.
Now, there is a difference between profit, petty cash and cash flow. Your business profits are the amount of money that’s left after you deduct total costs from revenue. The higher the number, the better. But if your costs outweigh your revenue, then your business can be in trouble since it’s operating at a loss.
Petty cash is a small amount of excess cash that gets used to make a purchase when it’s needed. It’s meant for quick payments, like if you need to purchase a coffee for a client meeting or send a postcard. You still need to make sure you’re recording petty cash expenses so you can expense them.
Why Is Cash Flow Important?
Having positive cash flow is good for business. It means that the money that’s flowing into your business is higher than the money flowing out. And staying on top of your cash flow is incredibly important for your business.
Here are three major reasons why cash flow is important.
1. You Can Understand Where Money Is Getting Spent
Effectively managing cash flow will provide you with a better understanding of where you’re currently spending money. You can’t get this same insight from a profit and loss statement, so it can be important to understand where your money is going.
You can use the information you get to help make better business decisions. It could be reducing some operating expenses, looking into loan payments or a cash flow analysis. Whatever it is, your business financial performance and financial goals can get met.
2. You Can Make Better Decisions and Plan Effectively
When you understand your cash flow, you know exactly where your funds are and how much you have available at any given time. This can be critical information to know for planning and decision making. It can help avoid costly mistakes that could put your business at risk.
3. You Can Protect Your Business Relationships
If you don’t know where your business stands with its cash flow or if you’re having cash flow problems, how can you pay for certain things? If you don’t have the right amount of funds available to pay a supplier, for example, it could harm your relationship.
And the last thing you need as a small business owner is to have poor cash flow activity and damage your reputation. Setting payment schedules can help ensure you have the right finances to pay suppliers when you need to. It can be helpful to do some advanced planning so you don’t have to submit multiple bills or invoices at the same time. This can help you flip any cash flow issues into a healthy cash flow.
There are so many things that you need to worry about when running a business. You have to worry about accounting processes, marketing efforts and the overall operation of your business. Plus, things can sometimes happen that cause disruption or add unexpected costs.
This is why knowing and understanding your cash flow is so important for your business. You can make sure that you know and understand where your money is getting spent. This will help avoid any costly mistakes or missed payments. Plus, having a positive cash flow will help ensure that your business relationships stay positive.
Ultimately, cash flow is important to help you make better and more informed business decisions. You will know exactly where your funds are and how much you have available to you. This way, you can plan accordingly and reach your business goals.
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