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Why Do You Need to Improve Your Cash Flow?

By: Ian Varley

 

cash jar

Small business owners face a ton of obstacles while growing their business. Starter capital, business planning, marketing, and stress are just a handful of these problems for entrepreneurs. Possibly the biggest hurdle in owning your own business is managing your cash flow. 82% of failed businesses cite cash flow as a reason, so it is absolutely crucial that cash flow stays top of mind for small business owners.

Benefits of Healthy Cash Flow:

  • Make supplier payments on time
  • Meet payroll
  • Accept more purchase orders
  • Grow your business

Cash Flow to Meet Supplier Payments

The most obvious reason why cash flow is important is that you have bills to pay. Late payments to your suppliers could lead to late fees. On the other side, late payments may lead to harm in that business relationship. You could lose your preferred supplier. If you suppliers report payments to credit agencies, you may see a drop in your business credit. If you have the cash flow to make your payments on time, then you could see an increase in your business credit score, a better relationship with your suppliers, and maybe even a vendor discount for early payments to your suppliers.

Meeting Payroll with Strong Cash Flow

The most universal recurring cost to small business owners is payroll. Every month and possibly even more frequently, you have to pay the people working for you. The government reinforces this as well. Not only could you damage relations with your most valuable business assets, the people dedicating their time to your company, but you could run into legal battles from not paying your team on time every time. Improving your cash flow for business growth is great, but improving your cash flow to stay legally compliant and to pay your employees on time is necessary.

Having the Cash Flow to Expand Sales

More sales means more overhead costs associated with those sales. Whether your capital is tied up in your receivables or you need to afford the supply costs of the new sales, having strong enough cash flow to afford accepting new clients or larger sale volumes means no longer waiting to grow your revenue. Healthy cash flow enables you to make more sales for your business without worrying about the costs of fulfilling those orders.

Small Business Growth and Cash Flow

From supply costs to accepting new sales orders, your cash flow statement is the determining factor in your business growth. New employees, new locations, or new products all require immediate capital. Positive cash flow, AKA more money coming into your business than going out of your business in the form of payments, enables business growth. Accepting larger purchase orders, seeking new markets, or increasing the size of your team is all impossible without strong cash flow.

Improving Your Cash Flow

There are lots of methods you could use to improve your cash flow. First, determine what costs in your business could be unnecessary. Is your team too big? Do you have a surplus of inventory? See where the capital in your business is stagnant. Next, examine your accounts receivable. How long are you waiting to be paid for your work? Could you accept early payment at a slight discount?

Finally, consider small business financing options that improve your cash flow. This will be debt-based financing like long term loans, asset-based lending like equipment finance, or even debt-free financing like invoice factoring. Just be sure whichever method you choose will not hurt your cash flow through expensive interest rates or too frequent repayment requirements.

Published: February 24, 2020
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Ian Varley

Ian Varley is the CEO of Eagle Business Credit, an accounts receivable financing company that specializes in fostering growth for other small businesses. Ian is a thought leader in the small business finance community, promoting his ideas at EagleBusinessCredit.com. Connect with Ian on LinkedIn and follow @EagleBizCredit on Twitter and Instagram.

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