Why Effective Cash Flow is Essential to Business (and a few tips!)

Business is all about cash flow. But what do you understand by this term?

Basically, cash flow is the money that flows in and out of your business, and having a positive cash flow means that more money is coming in than going out - the position you want to be in!

Cash flow is just as important as overall profits to a business, particularly when it comes to determining your business performance. New and growing businesses usually require more cash to buy stock, expand their team, and so on - so it’s important that you stay on top of the cash flow of your business.

If cash flow is negative, things can get difficult for your business fast. It doesnt take long for bills to mount up, with suppliers, landlords and employees beginning to demand payments.

This is why cash flow management is crucial, and where having a reliable cash flow forecast can be of great help.

The Importance of Cash Flow Forecast

Your sales predictions and pipelines may look encouraging, with lots of recent enquiries and new customers. This is all well and good in theory. But unfortunately, you can’t pay the bills with theoretical cash - it needs to actually be in your bank account, ready to spend!

If you don’t have the money available as and when you need it, outgoings can quickly overtake incomings. This is where an effective cash flow forecast is worth its weight in gold. If you see the threat of a shortfall coming up, you can take action.

Managing your cash flow efficiently is an art form in itself, and having the right tools can be instrumental in success.

The Importance of Cash Flow Forecast

A cash flow forecast tool can help determine how much money your business will have in the near future - helping you gain better visibility over the feasibility of your business plans.

Cash flow differs from a profit and loss account in that cash flow is the actual money going in and out, whereas profit is the net income after expenses have been deducted.

It provides an estimate of how much money the company will make in future using the company’s current resources and estimated expenses. An up-to-date cash flow forecast will be needed when applying for business financing, and is particularly important for start-ups and small businesses to improve the chances of securing funding.

Download a free template here to get started. Bear in mind that when applying for bank and government loans you should get help from an expert accountant.

Tips for Cash Flow Management

The most important tip is to invoice early and regularly! Clients very rarely pay until they are invoiced, so it’s in your interest to have your invoice ready and prepared to send as soon as your part of the agreement has been completed.

It’s also crucial to monitor and control your spending. Look at where you can save costs with essentials like utilities and suppliers, and whether you can spread the costs of larger purchases. And critically, try to stick to only purchasing what is absolutely essential.

And finally, avoid the dreaded lifestyle creep. Don’t splurge just because you’ve had a positive month - prioritise saving and building up a backup fund for those months when things are leaner.

If you want expert advice on any aspect of small business finances, get in touch with the experts at DNS Accountants for a FREE consultation!

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.