The Importance Of Cash Flow

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A while ago, I worked in a pub, it was very successful under the ownership of the previous owner. Then, the pub was taken over and it all went downhill from there. The main reason? Cash Flow! The new company purchased the pub without any liquidity readily available, in other words they had nearly no cash to run the pub. The consequences of this fact alone had dire results on the day to day running of the business, first we ran out of beer, then we ran out of food, we didn’t have the required float, suppliers kept chasing payments, we didn’t have enough staff and those who work were always paid late. The list goes on…

Needless to say, this had a direct effect on the customers. Within 6 months the business went from taking £12,000 each week to just making over £8,000. It went into liquidation after 9 months of trading. This is only a small example, but it applies to all size of businesses. Larger companies which would be very profitable under normal circumstances end up failing because of cash flow. What good is there in making millions in sales which will be paid to you in 3 months time, when you need to pay £400k to your suppliers next week?

Cash flow is of vital importance to the health of a business.


So here are my main points to keep your business and cash flow healthy:

Forecast: Start by projecting your cash flow for a full year. Your expenses, your income and the gaps between the two. It is particularly important to analyse this gap and the long term pattern.

Plan: Based on your forecast, you need to make sure you have enough liquidity to cover these gaps. In other words, you want to have enough money readily available in reverse to cover the times when your expenses will be higher than your income.

Anticipate: Have a contingency plan in place for the times you need credit. This could be easily arranged with your banker who would talk to you about your available options.

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