You may have heard people say that cash flow is critical to business, and they are absolutely correct. The important thing is to understand cash flow and learn how to manage it. The second biggest cause of the failure of startups is poor management of cash flow, so you can help your business survive by mastering it.
What Is Cash Flow?
Cash flow is the movement of money in and out of your business during a specific period of time. When you have positive cash flow, you have more money coming into the business than it is spending, and when it is negative, the opposite is true.
It is important to understand that cash flow and revenue are two different things. The revenue is how much your business makes, while cash flow measures both what you make and what you spend. Cash flow also considers how liquid your business is.
How Cash Flow Improves Your Business
One way that cash flow benefits your business is by helping you pay your bills on time. There will be times when you aren’t paid by your clients in time to pay your bills by the due date. However, paying these bills on time is important to your business. It helps to boost your credit score and it gives you credibility with your vendors.
Cash flow also allows you to afford what your business needs. If you need to make a repair or hire help, you will be able to do it. This is important to continuing operations.
You can also grow your business when you have cash flow. You may need to expand, order more inventory, or open a new location. All of these things cost money, and you will need cash flow to make it happen.
How Negative Cash Flow Hurts Your Business
If you aren’t able to manage your cash flow, it can have a negative impact on our business. You may not be able to keep your business running. You need to pay bills, pay your vendors, pay your employees, and more, and without cash flow, these things won’t happen.
You can also fall into a debt financing pattern, which can become habitual. You borrow money to pay the bills and then you use income to pay the loans. Then, you may need to borrow again. This makes it difficult to grow and get out of debt.