It is common to look at revenue as a marker of business success, and consequently many people overlook the importance of one other marker – cashflow. Cashflow is vital for maintaining and growing a profitable business. It may make your business look better if you have high revenue, but without a healthy cashflow your company will struggle – and could even go out of business. You will possibly be able to survive in the short or the medium term when you do not have a healthy cashflow but you probably won’t make it much further into the future. Here’s why cashflow is so important – and what you can do to improve yours.
What is Cash Inflow and Cash Outflow?
The cash that comes into the company is called the cash inflow, and it is probably coming via the sale of goods or the provision of services. The cash that goes out of the business is called cash outflow and this cash is used to pay for labour, materials, utilities, etc. Cashflow is the difference between the two numbers. When you take in more money than you spend, you have a positive cashflow. When you spend more than you receive, your cashflow is negative.
What’s Wrong with a Negative Cashflow?
When your overall cashflow is negative, whether for a short period or long-term, it means you will find it difficult to pay bills, pay wages, and cover your running costs. If you have a negative cashflow over a long period of time you will run into serious problems.
Why is Cashflow Important?
It is important to have a healthy cashflow so that you can meet the demands placed on your business by suppliers, customers, and your employees. You need to be able to pay your bills on time. It is also important to have a healthy cashflow for the times when your incoming cash is lower – for example, at slow times of the year for a seasonal business. It is important to manage cashflow so that you have control of your cash and won’t have to apply for an emergency loan at a high interest rate.
How to Control Cashflow
There are a number of strategies a business can put in place to improve and maintain a healthy cashflow. You can make sure that cash is readily available by not putting all profits into stock or property. You can stay on top of debts and chase invoices quickly, or you can set up an invoice finance agreement with a supplier like ultimatefinance.co.uk so that you see the cash from invoices immediately even if the supplier or client pays later. You can also negotiate better terms with suppliers, consolidate debts, and make sure you are taking advantage of all assets, for example empty space in a warehouse or a building that is not being rented.