All businesses, whether large corporations or small sole proprietorships, rely on an inflow of cash resulting from investments, sales, loans, and a number of other sources. However, these inflows of cash are interrupted by outflows of cash, which are essential disbursements to funds such as payroll, investments, operational expenses, and capital expenditures. Because of this, it’s vital that each and every business has a cash flow management plan in place.
Cash flow management involves forecasting cash inflows and outflows, recognizing that the timing of inflows and outflows does not always match, and careful advance planning in order to compensate for fluctuations in cash flow whilst ensuring that a sufficient cash reserve is maintained in order to cover operational and capital necessities.
Managing cash flow also includes ensuring that customers pay their debts on time, as well as reducing outflows by working to reduce waste and other operational efficiencies. Why is it so important that your business has a cash flow management plan in place? Read on to find out more.
Risk of Insufficient Funding
When it comes to running a successful business, cash is an extremely vital and important factor. Without sufficient cash availability, your business may be unable to operate. Cash is needed in order to pay suppliers, creditors and employees in order to sell your products and run your business. Having a cash flow management plan ensures that there is always an adequate amount of cash available in a reserve in order to make necessary payments.
If you do not have a cash flow management plan in place, your business is at risk of running out of sufficient cash in order to cover these expenses, which could result in a major setback or even the demise of your company.
Paying Your Employees
Employees are the people who are at the forefront of your business, and without them it would be very hard for your business to continue to run. If you don’t have a successful cash management plan in place, then it’s very hard for you to be able to plan how you’re going to provide your employees with a pay check each month. It’s perfectly reasonable that employees should expect to be paid regularly, the right amount and on time – so having a cash flow management in place allows you to ensure that you have the right amount of money reserved in order to pay your staff.
Paying Your Suppliers
Suppliers are vital to a business – they are the people who you buy your products from which in turn you then sell to your customers for a profit. Without enough cash to pay your suppliers for the products you are investing in, you will be unable to sell to your customers, and profits will drop. For this reason, a cash flow management plan is vital in order to have a clear projection of the cash outflows owed to your suppliers.
Business Growth and Expansion
Many small business owners dream of their company growing and expanding to be a well-known business, and this kind of growth is entirely possible with the right kind of plans in place. In order to grow and expand your business successfully, a cash flow management plan is just one of the vital strategies that you will need to implement into the running of your company.
Managing cash flow not only helps you to estimate how much money you will be making and spending in the future, it also allows you to maintain your business and keep enough cash reserved for any emergencies. Without this essential plan in place, it is highly unlikely that a business will grow.
Paying Your Creditors
The vast majority of small business owners will have usually borrowed some money in order to finance the start-up of their company. If you are in this category, you will probably be aware that this money needs to be paid back to your creditors in the form of regular payments, which are usually stretched out across a long contract term.
Without a cash flow management plan, it can be very difficult to determine whether or not you are able to afford these payments each time that they are due, and failing to repay your creditors could have disastrous results, such as becoming bankrupt and/or having to close your company down and sell assets in order to repay the outstanding debt. For this reason, having a cash flow management plan is an effective and essential strategy that will enable you to plan ahead for making these payments and ensure that they are always paid in full and on time.
Without a proper cash flow management plan in place, business owners often find themselves guessing at how much they need to spend on expenses such as supplies and wages. Estimating cash inflows and outflows can often result in overspending, which can have disastrous effects on a business, especially a small business that’s just starting out. For this reason, having a cash flow management plan is absolutely imperative to ensure your spending is controlled, calculated and that you always have adequate cash available in a reserve in order to pay your necessary expenses.
When a business starts to grow, it’s very tempting to want to begin to buy more products to sell and employ more staff, for example. In order to do this, you will need to have enough money available, but also ensure that enough accessible cash for the purpose of paying fixed-term expenses such as repaying business loans, rent on a property, paying existing staff and suppliers, and taking a wage for yourself. Without a cash flow management plan, it’s easy to overtrade and quickly run out of available cash, causing you to run into major problems with your business.
Planning is an essential part of running a successful business, and good cash flow management is a strategy that should be implemented from the very beginning. Whether your company is a start-up is beginning to grow, don’t ignore the benefits of a careful cash flow management plan.
Images: “cash flow illustration graph over a white background/Shutterstock.com“
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