If you have a business, but you do not have cash flow, you should start keeping as much memories of the business as you can because, very soon, you won’t have a business any longer. Without cash flow, you cannot pay for supplies, pay bills, pay salaries, reinvest in your business, or pay yourself.
But we may be getting ahead of ourselves. What exactly is this cash flow? And why is it so important?
Simply put, cash flow is the entire sum of money coming in and going out of your business. If you are able to manage this flow of money, your business is healthy. If you aren’t, your business is- or will soon be, on life support.
Most every business, at one point in time or the other, has experienced cash flow problems. Some ended these problems once and for all. Some were ended by these problems, once and for all. We assume you do not want to belong to the latter category. We would learn how to end those cash flow problems in a bit. But first, let us learn a few reasons why these problems happen, in the first place.
- Experiencing Losses or Low Profits: If you have consistently low profits, or you experience losses, even if you have a large reserve, you will eventually need to shut down operations, or be forced out of business.
- Over-Investment in Capacity: If you invest too much short-term finance on fixed assets, you sacrifice liquidity.
- Holding Too Much Stock: Holding too much stock ties up valuable cash and hinders cash flow. If held stocks lose value, or become obsolete, that spells doom.