Why cashflow is the lifeblood of a business
The term “cash is king” is often bandied about in business. It is essentially a simple mantra which states that in order for a business to grow, it must have sufficient cash to allow for current expenditure and future growth. Profit is of course important but it must be remembered that profit and cash are not always the same thing. Here we explore why cash flow is so important and how to maintain healthy cash flow.
Profit and cash flow are not the same
Profit represents the return after costs over a time period. Cash flow, however, is the flow of cash into and out of a business over time. Although a business may win lots of work and trade profitably, the cash flow may not cover the payment of bills, wages, rent and supplier accounts. This is particularly challenging when customers pay slowly and the business has to pay quickly.
Stay in control and grow
With positive cash flow (more money coming in than going out) a business has the freedom to plan ahead and seize opportunities as they arise. You can invest in extra equipment or marketing and enable your business to grow whilst still having enough cash to pay the bills.
Manage debt
By effectively managing your cash flow you can avoid having to borrow to cover shortfalls between income and outgoings. You can also build up a cash reserve to avoid having to use expensive overdrafts or short-term loans to cover these types of shortfall and become more self-sufficient.
Enlisting the help of Evesham accountants such as https://www.randall-payne.co.uk/services/accountancy/evesham-accountants/ will help take the stress out of accounting and cashflow management.
Keep things running
You need to pay suppliers and staff on time and cover overheads such as rent and utilities. If customers pay late, you can quickly find yourself squeezed. Late payment is a common problem. With over one-quarter of UK small- and medium-sized enterprises struggling with unpaid invoices, according to NatWest Group, keeping cash flow healthy is essential in case of late or non-payment.
Plan ahead
A cash flow forecast will allow you to predict cash flows in the future, usually month by month, and identify potential cash shortfalls, plan for major purchases and make strategic investment decisions to aid growth.
Ways to improve cash flow
| Action | How it helps |
|---|---|
| Invoice promptly and clearly | Gets money in sooner |
| Set and enforce payment terms | Reduces late payment |
| Chase overdue invoices early | Stops debts building up |
| Offer easy ways to pay | Removes excuses for delay |
| Review costs and subscriptions | Reduces money going out |
| Keep a cash reserve | Cushions unexpected gaps |
Frequently asked questions
Can a profitable business run out of cash?
Yes. Even a profitable business can run into cash flow problems due to customers paying slowly, stock holding cash and rapid growth meaning that a business must pay for materials and staff before it receives payment. This therefore means you need to forecast and manage cash flow in addition to measuring the profitability of a business.
Can I charge interest on late payments?
In the UK, interest and compensation can usually be claimed on late commercial payments from other businesses (as long as the contract hasn’t overridden these statutory rights). Make sure your payment terms are clearly set out on your invoices so you can claim interest where payment is late.
Where to go next
Year-end figures matter too. Read our beginner’s guide to statutory accounts.
It is easy to focus on profit alone, but healthy cash flow keeps a business running and gives it room to grow.
