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4 Reasons Why Cash Flow is Important to a Small Business

4 minute read

For your business to be as healthy and prosperous as possible, you need to keep an eye on profit, cash flow and petty cash. Although all are important, there are differences between the three that are useful to know so you can make better-informed business decisions.

 

Blog 23 X Reasons Why Cash Flow is Important to a Small Business

 

For your business to be as healthy and successful as possible, you need to keep an eye on profit, cash flow and petty cash. Although all are important, there are differences between the three that are useful to know so you can make better-informed business decisions.

 

Cash Flow vs. Profit vs. Petty Cash

 

To make things as simple as possible, here are a few quick explanations. If you’re confident you already know your profit from your petty cash, then head to the next section where we’ll cover precisely why it’s so important to keep an eye on your cash flow. 

 

If your business runs out of cash, and cannot borrow from somebody, then it is probably about to fail.

 

Cash Flow is the money that’s flowing in and out of your small business - hence the name. Having a positive cash flow means that more money is coming into the business than going out. It’s just as important as profit when it comes to determining your business’ performance. 

 

Keep in mind, you might have a high overall profit but if cash flow is low, then you may still face problems like overspending or ordering too much stock. Fast growing businesses tend to require more cash to buy stock, hire employees, etc. so it’s vital to keep an eye on cash and cash flow.

 

Profit is the amount of money left once total costs have been deducted from revenue. Obviously, the higher the number, the better. If the costs outweigh the overall revenue, then a business has operated at a loss and is in financial trouble. 

 

Petty Cash is a small amount of money that’s used to make small purchases when needed. You use it for quick things like posting a letter or for a round of coffee for the morning client meeting. These expenses should be recorded so make sure to hold on to all of your receipts. 

 

As we’ve said, all three of these elements are essential to the health of a business but it’s important to know that they’re different. Just because profit is looking healthy, it doesn’t mean you have a positive cash flow to support growth. 

 

Why Keeping on Top of Your Cash Flow is So Important

 

1. Make Better Plans and Decisions

 

With an accurate cash flow statement, you’ll know the exact amount of funds you have available at any given moment. This is vital because any plans and decisions you make must be supported by accurate information. If you don’t manage your cash flow carefully, then you could be making bad decisions that put your business at risk. 

 

You may feel as though your business is in a strong position but a cash flow statement could show that there isn’t much money coming into the business that particular month. This could be because you haven't issued invoices to clients. Whatever the reason, with an updated cash flow statement, you’ll know not to make any significant purchases at that time. 

 

2. Understand Where You’re Spending Money

 

Manage your cash flow effectively and you’ll gain a better understanding of where you’re currently spending your money, something that's not on a profit and loss statement. It’s important to know exactly where the money you spend is going and why.

 

It isn’t always easy to see expenditures in black and white, which is why it’s so important to manage your cash flow effectively. You might be able to identify areas of the business that you can cut costs. 

 

3. Protect Business Relationships

 

If you’re having cash flow problems, then you may not have the funds available to pay your suppliers. This can harm the business relationship you have with them and damage your overall reputation. 

 

Set payment schedules to ensure you have the finances available to pay suppliers. It’s vital you do advanced planning so you don't face multiple invoices or bills all at the same time without the funds to deal with them. 

 

4. Expand at the Right Time

 

Growing and expanding your business is exciting. It means new markets, new staff members and more revenue. But, a word of caution. Expand at the wrong time or in the wrong way and you’re more likely to have issues in the long-term.  

 

Growth requires a lot of cash. Purchasing stock, renting buildings, hiring employees and acquiring computers all takes place before the money starts coming in. If you don’t have the funds available to match your growth, then you’re going to run into problems. Manage your cash flow effectively and you’ll know when the time is right.

 

It’s clear that cash flow is crucial for companies of all sizes, but especially small businesses. A study found 82% of businesses that fail do so because they have cash flow issues. Make sure you’re not one of them by taking action with the right tools. 

 

Manage Your Bookkeeping Easily with our Templates

 

Keeping track of your business’ cash flow doesn’t have to be a headache. There are tools and solutions available that can help you to manage all of your finances and make smarter and more informed business decisions. 

 

To assist with managing your books, make sure to download our free templates. They’ll help you to track profit and loss, business expenses and cash flow. Click the link below to receive the templates. 

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