Why Cash Flow is so Important to a Small Business

Cash flow is the net change in your company's cash position from one period to the next. If you take in more cash than you send out, you have a positive cash flow. You have a negative cash flow if you have more cash outflow than inflow. Cash flow is a key indicator of financial health. Even with the fanciest brand name, marketing gimmick, or the best tasting product, without a healthy flow of cash, no company can survive.  Having a solid cash flow is not just about managing a healthy business; it’s a matter of life or death for an organization.  Though it may sound extreme, small business owners must pay attention to their cash flows on a regular basis.

Cash is King

The importance of strong cash flow is aptly stated in the common expression "cash is king." The premise of this is that having cash puts you in a more stable position with better buying power. While you can borrow money at times, cash affords you greater protection against loan defaults or foreclosures. Cash flow is distinct from cash position. Having cash on hand is critical, but cash flow indicates an ongoing ability to generate and use cash.

Keeping Up With Debt

When you borrow money to buy equipment and inventory, you essentially use future cash flow to make your purchases. Inherently, you need positive future cash flow to pay for your debt commitments. Companies commonly have long-term loans and short-term credit accounts with vendors. Each loan requires monthly payments. The obligation to make these payments on an ongoing basis restricts your free cash flow, which is money available to invest in growing your business.

Growth

Along with debt management, strong cash flow provides the comfort and capabilities a business needs to invest in growth. Building new locations, investing in marketing and advertising, renovating your storefront, improving technology, providing more training and purchasing more inventory are among the ways your business can grow and improve with strong positive cash flow. Getting to a position of excess cash flow helps your company operate in a strategic, proactive way, rather than a reactive, defensive way.

Flexibility

Cash flow also gives your business greater flexibility in responding to emerging dilemmas or making critical decisions. Confidence in cash flow makes it easier to make critical purchases in the near term rather than waiting. It also allows you to disperse cash in the form of dividends to shareholders or owners. This strengthens the bond between the company and its owners. You also have the ability to offer favorable credit terms to attract new buyers if you are less desperate for cash.

Uneven cash flow is one of the biggest challenges of small businesses throughout all industries. In a perfect world, you’d walk into your local bank and walk out with a business loan long before you wound up in a cash crunch. Well, those days are long gone! If you haven’t been in business at least two years, or lack good credit and collateral, chances are a traditional bank loan is never going to happen. 

In order to deal with this shortfall, a cash flow loan may be your best option. For this type of business financing, lenders provide you funds and use your future expected cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future by giving the lender the rights to a predetermined amount of these receivables. These are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role. As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is another great feature of a cash flow loan, as funding usually takes place in a matter of days.

A cash flow loan may be used for any business expense, but some common uses are: 

  • Working capital
  • High ROI short-term opportunities
  • Purchasing highly-discounted inventory
  • Payroll
  • Marketing 
  • Business expansion

Short-term cash flow loans are best used for short-term projects that would divert money from day-to-day expenses but ultimately grow your business, like taking on a big contract with a major company or adding extra seating in your restaurant. If you need cash fast, a cash flow loan may be your lifeline.

LVRG Funding is one of the nations largest and most trusted resources of cash flow loans. Want to know if a cash flow loan is right for your business, give us a call (855) 998-5874. We're here to help!