Why is cash flow important to a small business?


Cash flow is important to a small business because it shows how much money is actually moving in and out of your company, not how much money you’re awaiting from accounts receivable. If your cash flow is positive, you’ll know you’re earning more money than you’re spending, and you’ll have cash on hand to cover payroll, equipment purchases and upgrades, loan repayments and other key business needs.

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If your cash flow is negative, you may find yourself unable to pay your employees and suppliers, cover your monthly rent and have the money needed for any other daily business costs.

For these reasons and more, you should always prioritize cash flow strategies in your business planning. When you properly utilize such planning, you’ll know exactly which times of the month you can expect money to be deposited into or withdrawn from your bank account. With this information, you’ll know when you actually have the cash on hand to cover your expenses. Think about it like this: Even if you’ve invoiced a client for a substantial amount of money, you can’t use that money until you actually have it, and cash flow strategies help you know just when that will happen.

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An important element of your business model that can help with cash analysis is proper accounting standards. While businesses can run on a cash or accrual basis, Rohit Arora, CEO of small business loan provider Biz2Credit, advises every business to take advantage of both.

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