Why business cash flow is more important than ever

Business Rescue

Cash flow is at the heart of any healthy business. A strong case could be made that with the challenges facing companies during COVID-19 it’s even more important than profitability right now.

Ensuring that you have cash coming into your business makes sure that you can meet key expenses such as staff wages, rent and supplier invoices. The hard truth is that a shortage in your cash flow – especially one which stops you meeting these priority payments – can quickly lead to a situation where insolvency looms large.

How to manage your business cash flow

Managing your cash flow effectively allows a business to forecast future cash levels, which in turns ensures that you have enough to pay your monthly bills and – vitally – that you have a level of cash in reserve for any occasions when cash doesn’t arrive as expected.

Being able to forecast your cash flow as accurately as possible is a key task, as any business which runs out of cash without obtaining new finance will soon become insolvent. Many of the businesses we advise on financial issues have fallen foul of their cash forecasting processes being inadequate, or in some cases non-existent. We’ve seen the implementation of cash flow forecasts bring immediate improvements for many companies. 

Why is a cash flow forecast so important?

• A cash flow forecast highlights potential cash shortfalls in advance, enabling a business to take measures to correct the issue before it is too late.
• It also makes sure a company can afford to pay its staff and suppliers. Failure to pay suppliers leads to not receiving supplies, harming operations and causing further losses.
• It can also identify problems with customer payments; assessing how quickly, or not as the case may be, debts are being paid and highlighting issues as soon as they occur.
• It’s possible that external stakeholders such as banks will ask to be provided with a regular forecast. If a company has a bank loan, the bank may ask for a regular cash flow forecast.

A healthy cash flow perspective

A famous saying declares that ‘turnover is vanity, profit is sanity, but cash is reality’.

Profitability is of course important for a business, but any business owner should understand that profit and cash flow do not mean exactly the same thing, so a cursory glance over profit/loss statements doesn’t always provide the full picture.

For your cash flow management to be truly effective you must take into account various cash flow ‘pinch points’ as well as your profit and loss figures. A business doesn’t always have sufficient cash simply because it made a profit. That may seem a slight paradox, but allow us to explain.

When you invoice a customer, it creates turnover, and if the expense to yourself is less than that turnover amount, you record a profit. That’s great on paper, but you must actually receive the amount due from said customer in order to generate cash flow for your business. A positive cash flow is key for any business looking to increase profits and continue to grow.

Cash flow is a great indicator of your business’ overall health, so a negative cash flow, even if the business is currently profitable – risks putting a company into financial trouble.

Ensuring that you are tracking cash flow means that you are much better positioned to manage any risk to your business. You can’t always control what is happening, especially during a worldwide pandemic, but controlling your actions in the area of cash flow forecasting and management gives your business the strongest possible chance of a robust financial future.

How to find the right advice on your cash flow management

Here at The Insolvency Experts, our Business Recovery team offers a wealth of experience in helping businesses across a variety of sectors to deal with their cash flow issues.

Whether you are looking at cash flow forecasting, cash flow management or how to source funding, it is vital to act swiftly to deal with any cash shortfall. You can contact us today by emailing enquiries@theinsolvencyexperts.co.uk or calling 0300 303 8284. Our team will be able to assist with a free initial consultation.