People running businesses will have felt the sting of limited cash flow quite regularly, particularly in the initial stage. Whereas businesses need to trade profitably to be successful, they also need funding in order to survive. So “how does cash flow affect my business?”, we here you ask
At the outset cash flow can be quite critical. One may want to lease business premises and the landlord may want two or three month’s rent as a bond, and then the first month rent due before taking occupation. So, a considerable amount may need to be paid out before trading even starts. There may be plant and equipment needed in order to generate the income which the business was set up. With no trading history there is a fair chance that the supplier of these would want it to be purchased outright. Often a credit card may be used for this, which is a way of funding it. This brings interest and repayments into the cash flow needs.
Once trading starts there could be a time period required to produce your first invoice. If you have staff they may need to be paid before you get to invoice stage – so more funding required here.
Assuming you are past the initial stages and had sufficient start-up capital the importance of cash flow doesn’t stop. There are those customers/clients that will delay paying you, possibly because they have cash flow issues of their own. Then there could be the opportunity to stock up on materials as a supplier offers them at a good price. It could be that these need to be paid for before you receive payment for your sales that they generate. This is where working capital management becomes critical.
So, while having a good profitable business is what most people strive for, profitability is only one aspect that needs to be taken care of. There will always be the need for growth so a well-functioning marketing plan needs to keep the flow of customers coming in. There will often be the need to have the right people in the business as well, not just people who are just there for the wage.
While these are essential to move forward successfully, cash flow is critical to provide the capital for growth, and also at times, for survival. Many successful operations have failed as a result of not mastering this working capital management.