The Importance of Positive Cash Flow 2022
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Knowing where your cash flow stands can help paint a pretty good picture of your company's financial health. Cash flow also shows you how liquid and flexible your business may be at a given time. Cash flow essentially involves the amount of money coming in versus that which is going out. There could be a company that is quite profitable and yet their failure to time expenses effectively could leave them in a negative cash flow position. Having positive cash flow is so important to maintain daily operations and cover day-to-day expenses as needed. In this article, we look at what it means to have a positive cash flow and why this is crucial to any business.
Being Cash Flow Positive
For a business to operate successfully, they have to be able to pay employees, they need to purchase materials and inventory as needed, they also have to cover general operating expenses and overhead costs. This is generally done as a result of the cash flow they have coming in. If a business has good cash flow, it can meet its financial obligations. A company with negative cash flow is going to struggle when it comes to paying the bills. So even if over the long term, the overall picture of your company's finances seems positive, if your cash flow isn't where it should be, odds are that the company is still going to struggle. Cash flow goes negative when a business is spending more during a short-term period than it brings in.
Cash Flow Positive vs. Profitability
Being profitable and having a positive cash flow are two different things even though many people may confuse the two terms. A company can be profitable and not have good cash flow, and the reverse is true as well. Being cash flow positive means that at a given time you have more money coming into the company than is being paid out of it. Being profitable represents a bigger picture number; that is to say, over a year-long period let's say when the business subtracts all of its relevant expenses from its total profit, whatever is leftover indicates how profitable that firm was over that annual period.
While certainly understanding how profitable your business is is extremely important, it doesn't tell the whole story of your financial well-being. In other words, profitability doesn't give you a real idea of what the financial picture is from day to day. This becomes clearer when looking at your cash flow numbers. So, for example, profit cannot let you know if you can make payroll for the next week or if you can afford the raw materials needed to produce certain products over the next month.
Managing Your Cash Flow
Effective cash flow management is essential for the success of pretty much any business. Staying on top of what is coming in versus what is going out will help you to maintain more robust operations.
Cash flow management enables you to make predictions
Beyond just ensuring there is enough positive cash flow to cover the everyday expenses, managing your cash flow also helps you to make key predictions both short and long term. For example, after a while measuring cash flow, you can begin to see patterns from month to month in terms of when there may be more money available during certain periods. And by the same token, you can forecast those periods during which money may be tighter for the company. Especially for those who have seasonal businesses, measuring cash flow in terms of when it's positive and when it is negative can help you make important decisions for the business.
Knowing where cash flow stands can reduce anxiety
For most business owners, money issues are among the biggest causes of their stress. Carefully tracking cash flow can, to some extent, help to allay these anxieties. In large part, keeping tabs on cash flow potentially helps you to circumvent issues that may be leading to a negative cash flow position and thus enable you to turn things around before they can get really bad.
Having positive cash flow allows you to get better terms and rates
When you do apply for loans and credit, having a positive cash flow is going to be important. Creditors and lenders will look at the amount of money that your company has come in in conjunction with what you pay out during a given period. If it shows a negative cash flow, your odds of qualifying for a loan diminish drastically. Whereas, if you have positive cash flow, then this tells the lender for example that you have enough funds coming in to comfortably cover the cost of loan repayment on a month-to-month basis. Lenders are well aware too that the unexpected can arise within the context of business operations. With a positive cash flow, you are more likely to be able to cover the cost of any surprises and still manage your loan repayment.
Positive cash flow allows your business the room it needs for growth
For any business to grow, they need to reinvest in the company. That is to say, money needs to go back for the firm to realize any measurable growth. To do this and do so without feeling the pinch, you need to have positive cash flow, otherwise, you're going to be straining other resources. Keeping a close eye on cash flow lets you know exactly what may be available for reinvesting back into the business.
First Union Lending is here to help. We work with small business owners getting them the funds they need when they need them—not weeks or months from now. With short-term loans and SBA loans, among other products, we have the resources you need. And most clients receive the cash in their accounts within two days. Call today and let's get started!