When it comes to running a successful business, the most important aspect of financial management is cash flow. Whilst it may look impressive to have vast levels of revenue from sales, your primary focus should be on ensuring a regular inflow of cash. Don’t forget – even a multi million pound enterprise can still fail due to poor cash flow management.
The basic definition of cash flow is the total amount of money being transferred in and out of a business. Money coming into the business through the sales of products or services is known as cash inflows, with cash outflows defined as the money that flows out of the business to pay for costs such as raw materials and labour. The difference between the two is known as the net cash flow and can be either positive or negative. When positive, a business is receiving more money than it is spending and can therefore consider itself healthy. By contrast, a negative cash flow denotes that more money is leaving the business than entering, meaning that a cash crisis could soon be on the horizon.
Having a favourable cash flow is particularly important in times of economic decline, when credit is harder to obtain. Since many financial providers become reluctant to lend money, SMEs may find that access to emergency capital is restricted. It is therefore vital that cash flow is prioritized above all other matters. If a business can continue to ensure the regular inflow of liquid capital whilst controlling costs, it will be much better placed to ride out the storm of lower sales.
For more information on how you can improve your cash flow, download our ’10 ways to keep cash flowing’ guide: