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Why Is Cash Flow Important To A Small Business?

If you’ve got plans for your business, you’re going to need cash to make them happen. Dreaming big and running out of money isn’t a situation a small business wants to find itself in, which is why cash flow is critical to sustaining and growing a business.

Time for some hard facts: it’s known that 82% of small businesses that go out of business cite cash flow as the main reason.

Scary stuff right? But not if you’re managing your cash flow.

person holding black ceramic piggy bank

What is cash flow?

It’s the total amount of money being transferred into and out of a business.

Cash flow management can make or break your small business, and not enough people understand the real value of managing their cash flow properly. You might make the mistake of spending because your P&L might show that your business is profitable. But that’s not always the whole picture. On the flip side, not knowing how much cash will be in the business in the future means you might be more hesitant to spend money when actually your cash flow is healthy enough to do so.

The message here is: everything comes at a cost. Missing out on opportunities because you weren’t sure if you could spend money is equally as damaging as overspending for small businesses.

Understanding your cash position is the only way to make confident business decisions without having those ‘what if’s’ hanging around in the back of your mind.

In short, if a boat needs water for it to stay afloat, your business needs cash flow to stay buoyant too.

Why is forecasting your cash flow important?

Basically, your business can’t survive without cash flow forecasting. Managing your cash flow allows you to tackle unexpected and planned expenditure, making your spending more efficient.

To make managing cash flow a less daunting prospect than wading through countless spreadsheets, you can use cash flow forecasting software such as Float to understand what your future bank balance will look like. You can then use this information to make informed decisions for your business.

Whether that’s a new hire, upgraded tools, or a move to a larger office, a clear insight into your cash movements is essential. It’s the only way you can be certain you’re making calculated, accurate financial decisions for your business. The risks of not producing a cash flow forecast can be devastating to a small business.

calculator and notepad placed over stack of usa dollars

How can managing your cash flow help your business?

1. Know you can pay your bills

Creating a cash flow forecast will help you know whether you have the cash to pay your invoices, suppliers and bills. Staying up-to-date with the cash flow needs of your business is the best way to know how much money your business has, or will need, for a given period.

2. Manage late payments

You’ll be able to practice better credit control and get insight into what would happen if you experience late payments, or not being paid at all, and make arrangements in advance if that were to happen.

3. Understand your working capital

You can plan upcoming cash in and cash out to better understand your working capital now and in the future.

4. Stop overspending

You’ll be able to see exactly what money you have to spend and the impact a purchase will have on your cash flow, without worrying you’re spending too much.

5. Grow your business

Perhaps you want to expand your team? By modelling increased wages against the added revenue new staff will bring in, you can be certain you can afford to take on more staff.

6. Free up cash flow to invest in new products

With a regularly updated cash flow forecast, you can clearly see how much money you can afford to invest in your business and when is the right time to do so.

7. Accommodate for seasonal sales or trends easily

Building scenarios with forecasting software can help you input any seasonal revenue into your yearly cash flow projections and plan it into your budgets.

8. Regulate lumpy cash flow

Project-based work can sometimes result in inconsistent or fluctuating payments making it harder to keep an eye on your cash position. By keeping an up-to-date cash flow forecast, you can take action sooner and more effectively to even out those lumpy cash flow periods.

9. Budget for tax payments

You can calculate your expected tax payments and allocate a budget for them. No nasty surprises when your tax bill arrives!

businessman giving contract to woman to sign

Managing your cash flow can help you apply for business loans

Cash flow management is even more important if you’re considering bank loans or applying for funding.

Banks are notoriously cautious with administering their fund allocation and proving a business’ viability with financial statements is essential for securing funds for expansion and business growth. Being able to produce a solid cash flow statement, supported with forecasting reports from business cash flow software like Float, can mean the difference of your application being successful or not.

How do you choose the best cash flow software for you?

Choosing the best cash flow software for a small business means you should start by looking at what your end goals are: what are you trying to achieve? What are your long-term and short-term business goals? What data would help make your financial decision-making easier going forward?

Look at the specs and features cash flow apps are offering (like Float’s popular scenario planning feature) and match it to your business’ requirements. Many apps have website chat functions where you can ask questions, find how-to tutorials and support guides.

Always remember; try before you buy. A good software company will offer a free trial period to new users. What better way to decide if it’s the right product for you than to take it out for a spin using your very own accounting data!

Make sure you take full advantage of your trial period, it’s there to help you make the right choices for your business.

Is cash flow really king?

The simple answer is, yes, yes, and YES!

Making action plans based on your cash flow data and using features like scenario planning to map out clear courses of action means you’ll always have solid answers to cash flow questions.

Having cash flow tools like Float at your fingertips, and by working together with your accounting program such as Xero or QuickBooks, means you’re armed with real-time data and accurate insight to your cash position to avoid negative cash flow.

As a business owner, knowing exactly what your cash flow looks like each month is hugely empowering.

 

Go grab yourself a free trial of Float.

 

Further reading:

5 Steps To Successful Budgeting And Forecasting

Stevie Watson

How many open tabs is too many? Creates the content. Is all about the content. Senior Content Marketer at Float 🤓