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The Importance of Cash Flows for a New Business

When making considerations regarding your business’s financial standing, the lack of an accurate cash flow statement means the difference between identifying and acting on profit and loss. A business cannot know its financial standing and make effective management decisions without the presence of a cash flow statement.

Cash flow describes the total amount of money flowing in and out of your business. Having positive cash flow indicates that your business has more money coming in than going out. Negative cash flow means your expenses such as payroll, operating costs, and investments are exceeding your net income.

Having and maintaining a positive cash flow allows your business to be in an optimal position for profitability, decision making, and managing unforeseen expenses. This also serves as a protectant against foreclosures and/or loan defaults. This is especially important when borrowing money. You must be able to demonstrate that your business can handle the arranged payments of a loan. A negative cash flow will put you at risk of being overdrawn and thus, placing you in a position of needing to find the money to cover your overdrafts. Once overdrawn, it is very difficult for a business to recover and return to a positive cash flow position.

There are many things that can be done to help your business maintain a positive cash flow. The first of these is to design a simple budget for your business. This cash management strategy is an excellent way to get in the habit of being conscious of your business’s spending and knowing what kind of financial limitations you are under to maintain positive cash flow. Another key strategy is simple on paper, but often hard to adhere to, especially for start-up businesses. Spending money wisely is among the most beneficial things you can do for your business. It can be tempting to invest all of your money into a business to get it up and running, but this ultimately hinders the business’s long-term performance. It is crucial to save money in order to be able to cover the potential of unforeseen expenses previously discussed.

Here is an example of a positive cash flow (line items may differ from business to business).

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