The Importance of Cash Flow for Small Businesses
Cash flow measures the net amount of money flowing in and out of a business over a set period of time. It indicates the financial health of a business by showing how much liquid cash a business has on hand. A lack of understanding regarding its importance is what stunts the smooth functioning and growth of so many businesses.
Below I have rounded up exactly up all those points that will help you understand why being on top of one’s cash flow is so important:
Make Better Plans and Decision
An accurate Cash Flow Statement is a prerequisite to making any sound decision. Why? It helps you know the exact amount of money available to you. Not knowing the same before making an investment can lead to a liquidity crunch which in turn can be the beginning of a perpetual debt cycle. You may feel as though your business is in a strong position because of a good profit margin, know that profit is separate from cash flow. For example, your business could turn a profit of Rs. 2,00,000 one month but only see Rs. 50,000 of that in cash flow because the rest is pending in accounts receivables. That’s why profit and cash flow aren’t interchangeable terms.
Understand Where You’re Spending Money
Managing the cash flow statement effectively is of immense help in revealing where you spend money. It isn’t easy to see your expenditure in black and white, which is why it is important to know your cash flows. You can spot areas where you can cut corners and save up. This holds all the more importance in these cash-conscious times.
Keeping Up With Debt
When you borrow money to buy equipment, buildings, and inventory, you essentially depend upon the estimated future cash flow obligations to make the purchases. Each loan requires monthly payments. The obligation restricts your free cash flow, which is money available to keep the operations going smoothly.
Protect Business Relationships
Cash Flow Statement enables planning in a way that you don’t have to face multiple bills or invoices all at once. This way it helps ensure that supplier relationships don’t go sour and also acts as a north star to your invoice cycle.
With this, it’s a wrap. Hope it helps you and inspires you to instill a cash discipline.
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