Why Cash Flow is King as a Business Owner

06 Jun, 2016 / Comments: Comments Off on Why Cash Flow is King as a Business Owner / By

Believe it or not, succeeding in business does not mean you have to be a financial wiz. In fact, you do not even have to use fancy software to keep track of your finances. If you can do basic accounting, such as balancing a checkbook, you can be a successful business owner. The key, however, is having proper cash flow – without it, you will be among the 30 percent of businesses that fail within the first couple of years of starting.

 

Cash Flow Keeps you out of Debt

Debt is a dirty word when you own a business. The more debt you have, the lower your profits. Without cash flow, you cannot properly prepare for what comes next. Maybe you need to purchase new equipment or a large order comes in and you need extra supplies. Without cash, you will have to finance these items, which will just put you further into debt rather than pushing you further into the black. As you constantly chase your tail, so to speak, your ability to succeed dwindles.

 

Cash Makes Expansion Possible

If you have dreams of expanding your business one day, cash flow is crucial. Without it, once again you will put yourself into debt, just to make more sales. The cycle will never end as you constantly take on new debts just to make a bigger name for yourself. In the end, your checking account never gets bigger; you just shuffle money around differently so that your business can be larger. Sure, you might service more customers and you might take a larger share of the market, but if your cash flow does not increase, your business really doesn’t expand.

 

Cash Helps During Slow Times

The economy has peaks and valleys; during the peaks you do great and during the valleys you can really suffer. This is especially true if you are waiting for clients to pay you. If you do not align your billing with their billing cycles (you get paid when they get paid) you could find yourself waiting months for payments from several clients, which could cause your business to fail.

 

Cash Flow Makes You Look Profitable

If you need another business or investor to take a chance on you, such as a landlord holding the ideal property for your business or a key investor that you want to invest in you, cash flow is important. Without it, they will not see the profitability of your business and will not want to take a chance on you. Even if you have a checking account with large amounts of money, if the Profit and Loss Statement does not show money continually coming in, no one will want to take a chance on your business.

 

Cash Gets the Bills Paid

An obvious key factor in a successful business is paying the bills on time. Without cash, this becomes impossible. If you are always waiting for your account receivables to get paid, your account payables will start to become later and later. In the end, this puts your business at risk for failure as your vendors start placing your accounts in collections and taking legal action against you. Eventually, bankruptcy will be in your future unless you can get that cash flow up.

 

Cash is king, in your personal and business life, but it is crucial for your business to succeed. In order for you to reach your dreams of expanding or even to avoid becoming part of the 30 percent of businesses that fail, you have to figure out a way to increase your cash flow. Negative cash flow hurts the entire organization and is the recipe for failure as something as simple as paying your monthly expenses becomes nearly impossible, making your business fail. Focusing on your cash flow and nothing else right now can help you get your business up and running and eventually taking that larger market share that you desire.

 

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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