You’ve probably heard the term “Cash flow” over and over again when you read articles about business or when you listen to business leaders speak, but you’ve never really understood what it means and why everyone keeps repeating it.
Well, with this article my hope is that you will have a better understanding of what cash flow is and why it is important.
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What is Cash Flow?
Cash flow is the total amount of money (cash) that is moving in and out of your business over a specific time. It is the amount of cash or cash-equivalent that your company receives through customers or clients who are buying your products or services or gives out by the way of payment(s) to creditors or suppliers.
An analysis of your cash flow will help determine how much cash (liquidity) is currently available. Such analysis which is done through the cash flow statement can either show a negative cash flow or a positive cash flow.
When we say you’re cash flow positive it means that your business received more cash than the cash it paid out within the period.
While being cash flow negative is the opposite of cash flow positive it implies that your business sent out more cash than it received within the period.
By being cash flow positive, when more money is coming in than is going out, you have enough to pay your bills.
Being cash flow negatives implies that you’re in danger of not having cash to pay for your operating expenses. Having a negative cash flow can be caused by large cash outflows, loss, or poor timing of income and expenses. A business that keeps having a negative cash flow may find it difficult to grow as it would lack cash to invest in its expansion.
Why is Cash Flow Important?
Running out of money is the most recurring reason why startups and businesses fail. Running out of money means that your business lacks the cash it need to pay vendors, employers, suppliers and creditors to continue its operations.
- A Positive Cash Flow Aids Growth – A strong cash flow provides the comfort and capabilities a business needs to reinvest and grow. Businesses can only pursue expansion when they have enough cash to support their daily operations and some to spare. It can be the difference between a proactive and a defensive strategy.
- A Strong Cash Flow Helps Your Business Become More Responsive– There is a level of responsiveness that your business can afford when it has a strong cash flow. You’re better able to respond to changes in the market, shortages, and even dilemmas (like the corona virus pandemic). It gives you the leeway to take certain risks and decisions that you cannot avoid otherwise.
- Cash Flow Guarantees You Loan, and Debt Repayment– think about it, a strong cash flow means you have the ability to generate cash. This makes it easier for you to access finance for your business because it also speaks to your ability to pay back the loan.
- Cash Flow Provides Stability–Businesses with a positive cash flow have high financial stability. This enables them cover periods of cash shortage and need for seasonal cash injection like in seasonal businesses – those that have a large fluctuation of business at different times of the year, like holiday businesses and summer businesses.
- Cash Flow Supports Customers -When your business have cash available it can expand to support more customers by investing more in its sales and marketing efforts as needed for supporting new customers. You can also provide you the ability to offer credit to customers which can be very attractive and a good way to increase customer loyalty.
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