Running a small business has its’ ups and downs and so does your business cash flow. Having enough cash (working capital) on hand to pay expenses and purchase assets is vital to the long term success of your business. The challenge for most is managing the peaks and valleys of their business cycles. You may think it doesn’t really matter as long as your income statement shows a profit, right? While profitability is certainly important, thriving businesses know that there are a few key advantages of cash flow.
Expenses – Properly managing expenses is an essential responsibility of running a small business. Some expenses, like rent and utilities, are due monthly, while others, like payroll, might be paid weekly. Certain suppliers and vendors may have flexible payment terms or offer grace periods that can help when cash is tight. It’s important to have a system in place to monitor your incoming cash and a schedule for your payments. This will ensure you stay current with your expenses and also help you stagger payments according to importance and due date. Having a healthy cash flow will help you weather tough times without hurting your credit.
Expansion – Whether you’re expanding to new product lines, adding locations or simply increasing your marketing, healthy cash flow will give you a competitive edge in your marketplace. Growth opportunities are a matter of timing and cash strapped businesses aren’t in the position to act when the time comes. Having control of your cash flow will help you make better business decisions and enable you to take advantage of great opportunities.
Loans – Healthy cash flow is a key factor that lenders evaluate when deciding to extend credit to your business. Having a history of positive cash flow will tell lenders you manage your business responsibly and have the means to repay a loan. Short terms loans can help you take advantage of growth opportunities mentioned above. Working capital loans can provide an influx of cash to keep your business stable during down cycles or times of increased cash outlay, like ramping up inventory for the holidays. Whether you work with a bank or an alternative lender, cash flow will be part of what determines the financing available for your business.
Bottom line – Cash flow is the lifeblood of a small business. Monitor it closely and use it as a competitive advantage for your business.