When it comes to running your business, cash flow is something that you should be very familiar with as it directly relates to whether your small business succeeds or fails. But what is cash flow? Cash flow consists of the money that is being continuously transferred in and out of your business. For example, money comes into your business when you make a sale and money goes back out of your business when you pay for expenses such as rent, employee wages, and taxes. A positive cash flow is when there is more money coming into your business than going out. This is what you should aim for your business to achieve on a period to period basis. On the other hand, a negative cash flow can get your small business into big trouble quickly. Let’s take a look at why managing your business’s cash flow is so important and how it can contribute to the success of your business.
1. Allows for flexibility
No one has a crystal ball that’s going to tell them when huge, out of the blue expenses are going to hit. Your business could experience an emergency that requires a specified amount of money in order to fix the problem, like having to replace an expensive piece of equipment. If your cash flow is strong, you will be able to respond to these situations and be flexible in what you spend. It gives you that extra bit of cushion that is needed when situations like this arise. Also, a strong cash flow gives your business flexibility in taking out loans, if needed, to build a new location or add onto existing locations. Lenders prefer businesses who can effectively manage their cash flows and it gives you the room you need to grow.
If you adequately manage your business’s cash flow, this opens many different doors of opportunity including growth for your business. If you have a strong cash flow, this allows you to invest in your long-term business goals such as opening a new location, renovations of current locations, or even providing additional leadership training to your employees. The world is your oyster in terms of how you want to improve your business when you have a strong cash flow.
3. Debt is dangerous
If your business’s cash flow consists of more money leaving your business rather than coming in, this is a critical issue. The biggest reason why most small businesses today fail is their cash flows become negative, they take out loans and get in over their heads with debt. Debt is dangerous for your small business. Being in debt comes with opportunity costs, as you won’t have the ability to reinvest in your business and it also creates additional high interest rates that must be paid. If you can’t keep your head above water as it is, interest payments are just going to put you further into the red and can lead your business into a death spiral.
Cash flow is the most important metric for your business
Managing your business’s cash flow isn’t something that can be learned overnight. Through trial and error, you will learn what works best for your business and how to effectively manage the cash coming in and the cash going out. The most important thing to send you on a path of responsible cash flow management is to monitor it regularly and see where you’re running into issues. Do you need more sales? Are customers paying you late? Figure out why you’re ahead or behind and create a plan to fix your problems or build upon your successes. More so than any other business metric, your cash flow lets you know if you’re succeeding or failing. Developing habits that promote a strong cash flow today will only be helpful to the success of your business in the future.
About the author
Kim Phillipi is President and owner of Building Science Academy, LLC. This startup formed in 2009 and operates GreenFit Homes, a construction business, and JobFLEX, an app development company.