Cashflow is one of the most important elements of finance; it’s a key indicator of how much money is entering and leaving a business and can sometimes show how you deal with your money, which ultimately has an impact on the way you do business.
What is cashflow?
Cashflow is the net amount of cash, as well as cash equivalents, being transferred into and withdrawn from a company’s bank account. The money received is known as inflows, while the money spent is known as the outflow.
There are positive and negative examples of cashflow – all very important for those with interests in your business. Bad cashflow doesn’t necessarily reflect poorly on how you do business, as it may only be temporary, because good cashflow will balance out the occasions when the bank may not be looking too vibrant.
Positive cashflow is when the cash assets of your business are increasing, it’s when there’s plenty of money in the bank and you are able to operate comfortably.
Negative cashflow means your business is losing money – but it also shows that you may be poor at predicting when your income and expenses will occur.
Why is positive cashflow important?
Being comfortable allows you to settle debts promptly, reinvest in the business, pay outstanding expenses, provide your shareholders with money, and provide a buffer against any unexpected financial challenges, such as the recent coronavirus pandemic.
With positive cashflow, you can commit to doing more as you have the ability to invest and explore options to grow and develop your company.
Positive cashflow is critical for showing people how you do business – it indicates you can manage money well and pay promptly when monies are due.
But beware of having too much money; it may also indicate you aren’t prepared to invest in your business, as you are more worried about what’s in the bank, so don’t let positive cashflow impact your investments negatively.
Why is negative cashflow bad?
It’s still possible to have net profit and negative cashflow, although negative cash flow can make it difficult to grow your business; you have less disposable income to invest in its growth and development.
This may reflect negatively on how you do business – especially to those whose services you may be using – for example a freelance marketing expert.
If you have consistent negative cashflow, and ultimately build a reputation for not paying your invoices on time, because you do not have the cash to do so, this may prevent the best talent from helping your business.
Nobody wishes to work with anybody who is poor with how they manage their money, so it’s worth ensuring your cashflow is in the positive a majority of the time.
Why does a company’s approach to cashflow tell people about how it does business?
People will perceive how a business manages its cashflow in different ways – and that’s okay!
You may also find that cashflow may differ from one industry to the next, especially where greater investment may be concerned for the benefit of long-term profit.
For as long as a business isn’t consistently in the red, there shouldn’t be a major concern to those who are interested in your business.
Interested in learning more about cashflow and why it’s important to your business?
Get in touch with one of our experts today – we’d be happy to help.