Cash flow is king for many small businesses. At least that’s what accountants say. But why do so many professionals in this space have this opinion?
That’s the topic of this post. It explores some of the reasons why cash flow matters so much and why it is something that every entrepreneur and small business has to stay on top of all the time if they want to achieve lasting success.
It Supports Growth Opportunities
One reason cash flow matters so much is that it supports growth opportunities. These include hiring staff, purchasing equipment, and enhancing marketing. Without it, it’s hard to spend money where and when it’s needed.
As a result, cash flow often takes precedence over profit in the short term. You could be making a lot of money, but if you don’t have the financing to support that growth, you could find yourself in trouble.
It Prevents Debt Overload
Better cash flow also substantially reduces the burden of debt. Usually, you have to pay interest to investors constantly, but that becomes difficult when money isn’t flowing freely into your business.
The best way to get around this is to start generating cash flow from the outset. You want to ensure that you always have money coming in to make interest payments. Otherwise, things like bank loans and credit cards can become expensive quickly.
Good Cash Flow Ensures Your Operations Can Continue
Focusing on cash flow also means that your operations can continue, which is a priority for small business accounting. If you can’t pay staff or suppliers, you run the risk of everything grinding to a halt.
This issue is actually one of the main reasons a lot of startups go out of business. They can see that they are profitable, but they don’t have the lines of credit they need to keep their operations ticking over and making money.
It Makes The Business More Credible
A deeper reason why cash flow matters so much in smaller businesses is that it makes the whole enterprise so much more credible. Companies that fail to keep the money coming in every month can put off employees, investors, and even partners in some situations.
What’s nice about cash flow is that it proves the business is working. While it may not be profitable immediately, it demonstrates the ability to generate revenue and grease the wheels financially, so to speak.
This ability means that people looking at the business from the outside have more confidence. They see how it could ultimately work and thrive.
Accurate Cash Flow Provides a Buffer
Finally, cash flow is king for small businesses because it provides a buffer for when things get tough and you land on hard times. This sort of thing is essential when emergencies crop up and you need extra cash to continue moving your business forward.
Furthermore, cash flow gives you seasonal flexibility. You may discover that some parts of the year are busier than others, which can have a profound impact on the amount of cash you have on hand. Proper cash flow resolves this issue to some extent.
