What is cash flow and why is it so important for a business?

What are the different ways cash flow is vital to a business?

Cash flow is the movement of cash into and out of a business. It’s represented by cash in the company’s bank accounts and cash in hand and is a crucial element of any successful business.

In fact, it’s more important for a business to have positive cash flow than strong profits - without the cash to pay the bills every month, the business won’t survive, which makes its profit levels irrelevant.

So what are the different elements of cash flow and why is it so important for your business?

What is cash flow?

Cash flow consists of cash payments coming into a business when a customer or client pays their bill, for example, and payments that leave the business. These typically include paying the monies owed to suppliers as well as day-to-day bills, such as wages and utilities.

Positive cash flow means that more cash is coming into the business than is leaving it, and it’s important to operate a business with this in mind. Negative cash flow is the opposite and if not corrected can ultimately lead to insolvency.

Cash flow forecasts generally help business owners and managers to understand how cash flows through their organisation and highlight any potential upcoming cash shortages. This is vital information as it allows the business to seek additional financing ahead of time if necessary.

Why is cash flow so important?

Favourable lending terms

Operating with strong cash flows can help you access the funding that helps your business grow. Lenders commonly look at historic cash use and future estimations when assessing a business’s suitability for finance. Healthy cash availability also supports a good credit score, which lenders use to determine eligibility.

Avoids financial distress

Financial distress means a company struggles to pay its bills on time and can quickly lead to insolvency if the problem isn’t addressed. If cash flows are consistently negative the business risks failure, particularly if external circumstances change, such as a market decline.

Better supplier terms

Having positive cash flow puts you in a position to negotiate hard with suppliers for favourable terms. You may be able to secure longer payment deadlines, for example, which can be invaluable if your own debtors fail to pay or you’re consistently having to chase late payments.

Operate with confidence

If your company has no issues with cash availability you can make strategic decisions with more confidence and help the business to function optimally on a day-to-day basis. Knowing that the cash is there to fund growth projects lessens the risks of expansion and underpins long-term success.

Even if your business is highly profitable, a lack of cash can bring unexpected decline if it’s not managed effectively. UK Business Finance can provide professional guidance on how to achieve positive cash flow and limit your risk of financial decline. We offer free, same-day consultations and operate an extensive network of offices around the country – please get in touch to find out more.