Importance of a Cash Flow Statement for Your Business

Why Cash Flow Is King

Cash flow is a critical aspect of any business. Without it the entire business falls apart. You need to not only have the cash to pay for day to day operation, expansions and purchasing power, but to also have it at the right time.

Is cash flow the most important part of a business?

We have established the need for cash flow, but that is only part of the story. For many businesses cash flow is possibly even more important than profits.

According to research by the U.S Small Business Administration, insufficient capital is the number two reason given for the failure of a business. However, since 2008 more than 40 % of small businesses that have needed funding couldn’t secure financial backing from a bank.

One of the biggest fears of many business owners is losing their business because of a lack of available cash. Slow paying clients and customers are a big hurdle for businesses trying to manage their cash flow. Many CEOs have admitted that cash flow is one of the most difficult issues to deal with when running their companies.

The rules of cash flow

– Growth costs cash. You need working capital to enable growth. So the faster the business expands, the more cash you have to spend.

– Have a cash flow projection. Don’t run the business blindly. Ask yourself what the expected cash balance will be in one month from now? What about six months from now? These kinds of questions will significantly improve the way you conduct your business.

– Know the Receivable. Any money that customers or clients owe your business is known as “Accounts Receivables”. You need to understand that every dollar in the receivables account is one less dollar of cash available for your business.

– Cash is King. Quite simple cash is what keeps a business running. Without cash, there is no business.

Increasing Cash Flow

So how can we improve cash flow in the business? Well there are traditional options such as:

– Credit Cards – Have high interest rates and fees, makes them a dangerous choice.
– Bank Loans – Very low approval rates, plus hidden fees.
– Equity – Means you have to give up a percentage of profits or even ownership.

All the above financing options have many downsides. Are there any good alternatives?

Receivables financing is one good option of increasing working capital, without the risks and negatives of traditional methods. Accounts receivables financing, aims to convert outstanding invoices into cash in the shortest time frame possible.

Once you free up your cash flow, concentrating on running and expanding the business becomes much easier.