Cash is the lifeblood of any business. You might have heard this phrase too often because it is true. For any business to have growth, stability, and profit, having cash is the key.
The net balance of cash coming into and out of a firm at a certain time is referred to as cash flow.
It’s possible to have a positive or negative cash flow. Positive cash flow shows that a business is bringing in more money than it is spending away. Negative cash flow means that money is flowing out of the organization faster than it is coming in.
But if you have negative cash flow, sorry to say this- but you are in some big trouble. It has the power to put you in a spot where you are behind paying your bills, your investors are getting angry, and your business seems more like a nightmare.
So do not underestimate the importance of having cash flow in any business.
Let us look at different points, each enunciating the crucial part cash flow plays in any business.
Cash is the key
Having cash is very crucial to any business. It works as a security blanket for your business.
Having enough cash in hand can help your business stay on track with its day-to-day expenses. Having a positive cash flow means that you don’t need to take loans from any outside entity. Congratulations! You are debt-free. It happens because you have enough cash on your hands (literally), so you can pay your bills on time and keep your stock of goods updated, and the best part is that you get to decide how the management works.
Debt can seriously turn the tables for anyone. Debt can lead to unhappy investors and shareholders. It can cause many discrepancies in the business, and ultimately, they can start dictating how your management needs to work.
Thus, cash is the key to happy customers, a debt-free business, and a profitable company.
Cash flow or profit
But is cash flow the same as profit? No, though a lot of people might confuse the same. When all of a business’s operating expenses are removed from its income, profit is commonly defined as the remaining balance. When the books are balanced, and expenses are removed from proceeds, this is what’s left.
Profit can be transferred to the firm’s owners and shareholders in the form of dividend payments, or it can be reinvested back into the company.
Let us understand this better with the help of an example.
Casinos are businesses that see maximum cash flow- with players placing a bet and depending on whether they win or lose, the casino management needs to payout. A steady cash flow is required to keep the business running and allow for player withdrawals.
If a person wins a big hand, and the management is cash strapped, then it can lead to some untoward incident. Just imagine, if you are to pay $50,000, but if you don’t have the money in hand and have to borrow it at steep interest, then you end up making an unprofitable business transaction. Thus, popular casino operators like Betmgm also need to have a good cash flow for player withdrawals. Cash-in-hand for a high transacting business is a must- the right balance of opportunity and cash management can lead to profitability and the business’s future viability.
Maintaining the balance
It is necessary to maintain the right balance between having too much cash or too little.
Too much cash means a business is losing opportunities for growth and profit. Too little cash means the company is behind on paying off its expenses by a lot.
The solution- is maintaining an adequate ratio. Ratios like- acid test ratio and operating cash flow ratio can help a lot. These can help measure the number of times a business can pay off its immediate debts with cash inflow in that period.
Thus, the importance of having cash flow in balance helps your business to stay afloat.
Keeping your cash management in check
Like everyone always says, consistency is crucial.
You may have earned plenty of revenue or, better yet, you have positive cash flow i.e., the advantage of cash flow on your side. But all of it does not matter if you do not know how to manage it or keep it consistent. It will seem like your lucky day and nothing else.
To avoid this catastrophe, let us dive into some cash management tips.
Cash flow binds everything together. From everyday activities to investors, staff, raising various kinds of funds and repaying them as such. Revenue earned in cash from the operational activities is used to strengthen the core of the business to improve its customer service, like in the casino example above. It is where a cash flow management opportunity arises.
Managing cash is crucial for current liabilities and current assets like inventories, trade payable, and account receivables.
Let us look into 3 different scenarios:
One is account receivable. The company has a return policy of 15 days for customers, but it does not follow up or ask for reviews from the customers, and, in turn, the customers take advantage of that. As a result of poor cash management, the business may end up with a huge outflow of cash. That is why it is so important to follow up wherever cash is involved and look at how it aligns with the companies’ policies towards its customers.
In the case of trade payables, it is crucial to pay the debt in time, but one can always negotiate the time of payment with the supplier and pay them a little later.
While in the case of inventories, cash flow can come in handy. It can help to keep an adequate amount of inventory by way of good management.
Thus, good cash management is one of the essential parts of having positive cash flow.
Conclusion
Having negative cash flow is an awful indicator, sure. But what is more important is how to solve this predicament and turn it into something better. Hope these points help you understand the importance of cash flow in your business.
But remember, this is just the tip of the iceberg.
There can be many more tips for good cash flow management or more points defining the importance of cash flow. Find what fits your business and apply this knowledge.
