What Is Cash Flow?
In the world of business, there are a lot of risks that business owners don’t prepare for that can be devastating. If you do not have the proper amount of liability insurance, then you run the risk of going out of business after one liability incident. Cash flow is something businesses take for granted until they need it. But by the time you realize that you have cash flow problems, your company could already be in big trouble.
What Is Cash Flow?
Cash flow is the constant supply of liquid capital (cash) that your company has on hand to use for any purpose. The majority of cash flow comes from invoices paid by clients, but there can also be large infusions of cash from the selling of equipment or investments.
Why Is Cash Flow So Important?
Cash flow is normally what businesses use to pay recurring debts such as payroll, vendor invoices, and facility rent. When cash flow gets interrupted, the business will either have to rely on its line of credit (if it has one) or hope to get a business loan of some kind. When a company has to use its credit instead of cash, it adds to its debt because of the interest on the line of credit.
Why Is Cash Flow A Risk?
Having cash flow helps reduce risk, but not having cash flow can create a series of problems that can snowball into bigger issues. Many of the debts that are paid using cash flow, such as payroll and vendor invoices, are time-sensitive. If there is a standing line of credit in place that can temporarily cover those expenses, then the company only has to worry about paying more interest. But if the line of credit is maxed out or does not exist, then the company has to rely on a loan approval to keep going.
If the loan is not approved, then the company has to face some tough decisions. A company that misses payroll runs the risk of losing employees and gaining a reputation that might make it difficult to hire future employees. Most invoices carry penalties for late payments that can add even more to a company’s debt.
What Can Be Done?
Maintaining a healthy cash flow requires meticulous spending planning that forecasts needs weeks in advance. If your company is in jeopardy of missing payroll due to bad cash flow, then that is something that should be known at least a week in advance. Planning ahead allows you to see potential problems and gives you time to find solutions.
If your company is spending money faster than it is making money then you have a problem on your hands. At some point, your debt situation will overtake your budget and cause a lot of serious problems. Any company that operates with a minimal cash flow is taking a huge risk that could backfire and create a domino effect of problems.
Maintaining a good cash flow includes activities such as offering payment terms only to customers that have a history of paying their bills, having aggressive accounts receivable practices, and keeping an eye on spending. Once cash flow becomes a problem, it can become an issue that will haunt a company for years.