The Importance of Good Cash Flow for Small Businesses

As a small business owner, you're likely well aware of the importance of managing your finances. But have you given much thought to your cash flow?

Cashflow refers to the movement of money into and out of your business. It's not the same as profit – while profit measures the amount of money your business makes after all expenses have been paid, cash flow measures the actual flow of cash into and out of your business. And while profit is certainly important, it's not the only financial metric you should be paying attention to.  It’s possible to have a profitable business but still be cash poor.

Good cash flow is crucial for small businesses for a number of reasons. First and foremost, it helps you meet your financial obligations. Whether you're paying your employees, rent, or bills, you need a steady flow of cash coming in to ensure you have the funds to cover these expenses. Without good cash flow, you may find yourself in a tight spot when it's time to pay the bills.

According to research from Barclays, 58% of small and medium-sized enterprises (SMEs) are currently waiting on money that is tied up in unpaid invoices.

But good cash flow isn't just important for keeping the lights on – it can also help your small business grow and expand. When you have a healthy cash flow, you have the financial flexibility to invest in new equipment, hire additional staff, or take on larger projects. This can help your business increase its profits and become more competitive in the market.

On the other hand, poor cash flow can be devastating for small businesses. If you're consistently struggling to pay your bills on time or keep a positive balance in your business's bank account, it can be a sign that your cash flow is not where it should be. This can lead to financial difficulties or, in some cases, even bankruptcy if not addressed.

A business can survive many years without making a profit, but when it runs out of cash it can be over very quickly.

So how can you improve your cash flow? Here are a few tips:

Manage your expenses

Take a close look at your business's expenses and see where you can cut back or negotiate better deals with existing suppliers.

Maintain a positive balance in your business's bank account

It's important to have a buffer of cash on hand to cover any unexpected expenses or slow periods. Aim to keep a positive balance in your bank account at all times.  With banks like Starling, you can set up additional “Spaces” away from your main balance where you can keep reserves of cash.

Collect payments from customers promptly

Don't let unpaid invoices pile up. Set clear payment terms with your customers and follow up on any overdue payments quickly. 

Negotiate better payment terms with suppliers

If you're paying your suppliers on time but struggling to get paid by your customers, consider negotiating longer payment terms with your suppliers. This can help free up some cash in the short term.

Good cash flow is essential for small businesses. It helps you meet your financial obligations and gives you the flexibility to grow and expand. By managing your expenses, maintaining a positive balance in your bank account, collecting payments promptly, and negotiating better payment terms with suppliers, you can improve your cash flow and set your business up for success.