Success or failure of a business depends on many different factors. Whether you are in business or not it is likely that you’d consider profit or loss to be the foundation of success. However, less people give much thought to cashflow. In this article we are going to answer the question why is cashflow is important for business? Cashflow is in fact arguably the most important factor to the success or failure for businesses of every size.
What is Cashflow?
Cashflow is the incoming and outgoing of money from the business. Money spent on machinery, equipment, raw materials, rent, and staffing is business expenditure, money flowing out of the company. Income from sales is known as revenue, and is money flowing into the company. Cashflow is the balance between these two factors.
Positive cashflow is where there is an excess of money left over from revenue after outgoings, and negative cashflow is where outgoings exceed money coming into the business. Whether a company’s cashflow status is positive or negative has a huge influence on its ability to continue trading.
Why Is Cashflow Important?
Over 95% of start-ups fail, with some reports suggesting that 82% of those failures are directly attributable to issues with cashflow. This statistic alone, helps to illustrate the importance of understanding and managing cashflow within a business. Now let’s look at some of the reasons why cashflow is so important to business.
- Cover debt
- Stronger financial position
- Cashflow allows growth
- Access to finance
- Protection against seasonality or downturns
- Long term planning
- Business valuation
Cashflow and Debt
No matter how cash rich a business is, most businesses have debt of some form. The ability to make repayments against those debts is a vital component of keeping a company afloat. Positive cashflow ensures that debt repayments are made on time, and that debts are eventually repaid. Unpaid debt being called in, is a major factor that causes companies of all sizes to cease trading.
Stronger Financial Position
It goes without saying, that a company with large amounts of accessible cash is in a much stronger financial position than a company with few cash reserves. Cash in the bank can allow a business to negotiate better terms with suppliers due to the ability to immediately make payment, this in turn decreases production costs and increases profit margins in comparison to competitors.
Cashflow Allows Growth
Cash in the bank allows for growth when the opportunity presents itself. Growing a business usually requires an input of cash to purchase new equipment, raw materials and/or employ more staff all of which cost money. Being able to fund this investment quickly helps a business to grow without overstretching finances, or the need take on a loan or other credit that may be difficult to pay back and could ultimately cause the company to default and close.
Access To Finance
Credit ratings and the ability to secure finance are also directly related to cashflow. A business with positive cashflow is more favourable to lenders as the ability to repay the loan is more certain. Securing finance can aid growth, but only when the company can pay back the debt. Poor cashflow and poor credit ratings directly affect the ability of a company to expand.
Protection Against Seasonality or Downturns
Recently the number of companies going bust has exploded, this is due to the COVID-19 pandemic and ability of these businesses to weather the storm. Some businesses are seasonal in nature and need to constantly manage their cashflow, to enable them to continue paying their bills during quieter times from saved cash built up during their busier periods.
Companies that do not manage their cashflow and spend as much as or more than they are receiving, are much more likely to face an uncertain future should there be a downturn in business. During the recent pandemic, retail, entertainment, construction and other businesses have been forced to close for prolonged periods of time. While the government has offered support, this has often not met the full demands of many companies, which has subsequently resulted in large amounts of businesses getting into insurmountable amounts of debt resulting in their closure. Companies with large amounts of cash reserves have still struggled, however, many more have survived simply due to their improved cashflow situation.
Long Term Planning
A good cashflow strategy, and in-depth knowledge of the cashflow situation within the business is essential for long-term planning. Without a comprehensive knowledge of the cash in and cash out situation, it is impossible to make effective business decisions and plans for the long-term future.
Valuing a business is a difficult task and often very subjective. However, a big factor would include looking at cashflow, and a business with strong positive cashflow would certainly be more valuable than a similar business that had negative cashflow.
Cashflow and Commercial Finance
Now that we have answered the question why is cashflow important for business, let us explain how we can help your business. MC Commercial Finance is a finance broker, we can help you to manage your cashflow with products such as invoice finance, development finance or business loans. As a broker we are uniquely placed to look at your individual business and help to advise you on the best products to suit your needs, to maintain a high level of cashflow and to ensure ongoing success. Contact us today to find out more about how our services can help your business to maintain a positive cashflow and long-term trading future.