Importance of Cash Flow to a Business

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Cash flow is the lifeblood of business. It is the surplus cash on hand after obligatory cash outlays, which include overhead, payroll, purchases, debt, and taxes. Both a business's immediate solvency and potential for growth necessitate a positive cash flow.

Cash Is King

  • Businesses require a cash flow to function from day to day. They need dollars to pay employees, suppliers and vendors, and the taxman.

Mismanaging Cash Flow

  • Mismanagement of cash flows often augurs liquidity crises and compel businesses to borrow money. While sometimes necessary, loans and lines of credit add further costs to conducting business and reduce cash flow in the process.

Budget

  • To avoid liquidity problems, businesses should establish budgets with realistic forecasts on anticipated cash inflows and outflows. Critical management decisions on accounts receivable, accounts payable, inventory and debt load should be based on these illuminating numbers.

Manage Accounts Receivable

  • Central to cash flow is management of accounts receivable---sales on credit. While extending credit promotes both sales and return sales, collecting monies owed is crucial to long-term survival.

Manage Accounts Payable

  • Cash flow is obviously impeded by debt load---dollars owed to suppliers and vendors. It is imperative that businesses keep their accounts payable in sync with the reality of their cash flows.

Manage Inventory

  • A key to cash flow is proper management of your inventory. Excessive inventory is often the bane of cash flow---money that businesses could have in hand but don't.

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