It is easy to fall into the trap of thinking that profit is all a business needs to be successful. However, a healthy profit doesn’t equate to a positive cash flow to pay your employees and support growth.

Here are some insights into the importance that cashflow has on a small business.

1. Better business decisions

Knowing the exact funding available at any point of time is essential in making plans and decisions for your business. Without accurate and effective cashflow statements, there is an increased risk in making decisions that put your business at risk.

Whilst you may think your business is healthy, a cashflow statement could hint that not enough money is coming in during a particular period. Allowing you to make the decision of not making any significant purchases until more cash is expected in.

2. Understanding of where money is spent

A Profit and Loss will not always give you the best understanding of where your money is going. It is important to know exactly what you are spending cash on and why, as this could identify areas where costs could be cut.A Profit and Loss does not show you current or future cashflow, it’s more an opinion on what has happened to date.

3. Better business relationships

For a small business, reputation is important. Not being able to pay your suppliers because you don’t have enough cash coming in can harm the relationships you have. To avoid paying multiple bills at the same time set payment schedules to ensure you have the funds to make these payments.

4. Expanding with ideal timing

We all love growth – it’s exciting! But expansion at the wrong time without consideration for cashflow could cause long term issues. Growth requires substantial cash. Major expenses such as purchasing stock, additional rent, employees, and equipment all come before the additional revenue starts flowing. If you are growing faster than your cashflow can handle, you are likely to run into a few problems. Considering how you time your capital expenditure cashflow from either operating cash or borrowings is an important business decision that can only be made if you know what the future projected cashflow looks like.

If you are a small business – contact your advisor and book in some time to go through maximising cashflow strategies.

It could save your business!