You’ve heard it said before, but this fact bears repeating: “Revenue is vanity, profit is sanity, but cash is still king.” So the question of how vital cash flow is to businesses in Australia is a no-brainer: it’s very, very important. It is, in fact, the lifeblood of all businesses, from start-ups and small enterprises to large multinational corporations.
One of the strongest indicators of a business’s financial health, cash flow refers to the difference between how much cash is coming in and how much you’re spending on operating, financing, investing, and other supplemental business activities. A positive cash flow is a hallmark of a successful business—more so than huge profit margins, cutting-edge facilities, and a solid customer base.
Below are some of the main reasons why cash flow is important.
1. Cash flow gives you a better chance for survival
If the global financial crisis taught us anything, it’s that no business can survive long without a strong cash flow. According to Dun & Bradstreet, the trifecta of a high Australian dollar, low consumer confidence, and global economic volatility only made competent cash flow management all the more crucial.
The latest D&B Business Failures and Start-ups Analysis (Q4 2011) showed a 42 percent overall increase in insolvencies—a figure doubled among small business start-ups. This staggering closure rate, which affected more than 3,000 businesses in total, was attributed to failure in various business fundamentals, such as planning, strategic management, and business analysis. But the overriding cause for failure was poor cash flow management.
The trend isn’t even unique to Australian companies. An independent survey of 2,200 small businesses showed that as much as 68 percent ended up insolvent as a result of cash flow problems.The bottom line is, it doesn’t matter how profitable your business is. Until you get your cash flow sorted out, you will be operating at high risk.
2. Cash flow gives you a competitive advantage
If you want to attract investors, you need to make maintaining a positive cash flow a priority. It doesn’t matter what industry you belong to or how little competition you have—any potential investor will scrutinize your cash flow (your operating cash flow, to be specific). Why? Because it is the litmus test of your true profitability and future outlook.
Investors know that the steps you’ll need to take in order to develop a healthy operating cash flow are the exact same things that will increase their chances of getting a return on their investment. To them, it’s proof that you know how to score the best deals with your vendors, are able to settle your payables promptly, and have a steady stream of sales, among several others.
3. Cash flow gives you flexibility
Money is a necessity for emergencies and other situations that require mission-critical business decisions. A business that keeps second-guessing its investments and purchase decisions because it isn’t liquid enough will soon stagnate. Moreover, cash eliminates the need for contingency plans like short-term credit facilities and other temporary cash-management solutions that may end up draining more of your resources in the long run.
4. Cash flow gives you opportunities for growth
Maintaining a consistent cash flow teaches you to constantly find ways to make the most of your capital. This isn’t a freedom afforded to business owners who are still stuck trying to make the proceeds from their sales cover the cost of their day-to-day operations. Only when you get to a position of excess will you be able to channel your capital into growth-friendly investments: staff training, better infrastructure, bigger marketing campaigns, etc.
It takes a lot of work and a strategic mindset to improve your cash flow, and while it won’t exactly be smooth sailing once you’re in the black, pushing for a positive cash flow is well worth the effort. When it comes to boosting your business’s cash flow, the best time to start was yesterday.