According to a U.S. Bank study, 82% of businesses that fail do so because of cash flow problems.
As a small business owner, it’s vital that you understand cash flow, how it affects your bottom line and how you can increase it. Read on for information you need to know.
Cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Cash flow shows how liquid a company is and indicates if the company is positioned to remain solvent.
Timing plays a big role when managing cash flow. For example: If your business operates on an invoicing system and invoices aren’t paid until after loan payments or other debt obligations are due, you could end up with a cash flow issue. Seasonal business can also have cash flow problems. If money flows in during a specific season, you might end up just scraping by the rest of the year.
Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing.
Strong cash flow is one indication that you have the ability to generate and use cash. Cash on hand gives you better buying power and offers protection against loan defaults or foreclosures.
When you borrow money to buy equipment, inventory and other items to run your business, you’re using future cash flow to make those purchases. You’ll need positive future cash flow to pay back that borrowed money. Defaulting on debts ruins your credit rating and can sink your business.
With strong cash flow (and debt management), you can invest in growth strategies like beefing up inventory, increasing marketing, buying equipment and hiring employees.
In addition to running your business efficiently and profitably, having sufficient cash flow is important if you’re seeking outside funds. Lenders want to know that you’ll be able to make loan payments for the life of the loan.
If cash flow problems are hindering your ability to run your business or get a small business loan, there are strategies you can put in place to increase it. Following are suggestions that can help.