How Cash Flow is Everything to Small Businesses

How Cash Flow is Everything to Small Businesses

Many small business owners fall into the trap of neglecting cash as the most important aspect of their financial management. While there are important concerns like capital budgeting, capital structure and cash management – truth of the matter is, you’ll simply go bankrupt without cash. What would you use to pay the bills?

According to an article from News Leader, accounting numbers also do not seem to help small business owners in seeing how dangerous cash situations could be. Case in point: sales go into the books even if cash has not been received. The big picture is that you are profitable even if your sales are on credit. Ultimately, you’re still cash-poor. Even companies that post positive net income still go bankrupt because they run out of cash.

So what can you do to ensure that your small business keeps going?

Plan out your cash budget. Invest time in developing estimates. Think of your cash inflows and outflows for the next four quarters. History is your best guide in this case. You cannot fall into the assumption that your business will just develop fiscal restraint. The estimates will help guide you in figuring out the net changes in your cash position for every quarter.

Your quarterly changes should be positive. If your estimates say otherwise, then you still have time to plan and prepare for what could happen.

As a point of advice, Dr. K Stephen Haggard from Missouri State University says: “Be conservative when determining how much cash represents a safe level. How often do you have pleasant cash surprises versus unpleasant cash surprises? Sadly, windfalls are rare, but unexpected expenditures are all too common — the delivery truck breaks down, an employee gets injured, or a fire destroys part of your inventory.”

At Gapcap, we can help you with all your small business financial needs. From business loans to financing options, we have experts to help you.

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