Why Businesses Need Positive Cash Flow
Research reveals that poor management is a leading cause of business failure and bankruptcy. You need a positive cash flow to build a sustainable and successful business. Some businesses are considered liquid when they have enough cash to take care of liabilities in the future. But, you need to know that your business is not necessarily liquid even if it’s making profits. Lack of liquidity can significantly damage your credit rating and business operations. You can maintain positive cash flow by being organized and planning every move to avoid running out of cash. Here are some of the benefits of managing a positive cashflow irrespective of your industry.
The advantage of proper cash flow management is that you will never run out of cash. Managing the flow of money in your business allows you to predict the amount of money that will flow into the business. It also allows you to plan your spending so that you avoid spending more money than cash inflows.
When you borrow funds for purchasing stock, buildings, and equipment, you use your future cash flow to pay the debts. That means that you require maintaining a positive flow of cash to pay for the debts commitment. You probably have a short or long-term credit account with your vendors, and you are required to pay each loan monthly. Your ability to pay these loans depends on your liquidity. That’s one of the primary reasons why you need to maintain a positive flow of cash in your business.
You know that there are months when sales and payment receipts lag. However, you have to pay the bills even during the months when you haven’t collected payments. That’s a reason enough to have enough cash that will enable you to get through lean months without damaging your credit. Have cash reserves to take care of your bills when the flow of money is not there. You can review your history of cashflow and come up with reserve estimates that can take care of your business expenses for about three or six months.
Besides debt management, positive cash flow gives your business the capability to invest in its growth. Liquidity allows enterprises to build new locations, renovate infrastructure, offer more training assets, enhance technology and invest in development and research. When you are in a position of excess cash flow, you can operate your business proactively and strategically.
Cashflow is the difference between revenue and expenditure. You should monitor your liquidity to enable you to finance your long-term spending. You can achieve this by automating your invoicing and enhancing your account receivables.