What is the importance of Cash Flow
The dates you receive payments from your distributors and customers (inflow) and the dates you have to pay your employees and distributors (outflow) will determine your cash flow cycle. As long as you can coordinate the timings of your inflow and outflow in a way that you always have sufficient cash ready, you are safe.
For example, you have ordered a large quantity of stock for which you have to pay your distributors after 30 days. Now, if you are unable to sell the purchased stock before the 30 day period, you will have to adjust the money from somewhere else and your cash flow will become unbalanced.
As an enterprising player in the SME sector, you will always be on the lookout to make investments that add value to your business. You need to invest in property, new staff, new machinery and equipment (if you are planning to expand). You might also need to invest money in order to buy more stock to fulfill an exceptionally large order.
You may also just need cash flow to keep you going through a few tough months when sales are low. Cash Flow is the single most important element of your small business to get right.
However, if you are not maintaining proper records of your cash flow, you will find yourself crippled due to insufficient funds.
As a small business owner, you probably conduct most of your dealings in cash. Knowing exactly where and when your cash comes from and where it goes is one of the most important things you can do to maintain the financial health of your business.
3 Reasons for never neglecting your Cash Flow Statement
Even if you are running in profit, a careful analysis of your cash flow statement might indicate that you are running out of cash. Running out of cash would mean that your payments are sure to be delayed in the near future. Never neglect your cash flow statement if you want to save yourself from a bad reputation.
Your bank loans are not going to show up in the profit & loss statement. If you are making good profits while you consistently keep paying for the principal amount on your loan, don’t get delusional about your ready cash. Always consult your cash flow statement before you take major investment decisions.
Three areas that are often hidden away in the cash flow statement are inventory build-up, growth of receivables and payment timeline of your suppliers. Inventory buildup means that you have a lot of unsold stock in your warehouse or simply the lags in your manufacturing process. Letting your receivables grow will allow you extra time to pay your debts but a big delay can earn you a bad name. On the other hand, if you pay your suppliers really fast, you may face shortage of cash when you need it.
These are important pieces of financial information that you won’t get from your profit & loss statement, balance sheet or any other document apart from your cash flow statement.
At the end of the day it is critical to start putting money away in your bank account to keep for a day when you need it. When times are good and sales are doing well, increase the amount of money you have in the bank. You should aim to have a cash flow of at least 3 months worth of all expenses including rent, salaries, bills etc. This single action will help your business survive when others fail.