When it comes to your business’s finances, determining success can be challenging.
It’s all too easy to oversimplify financial success or failure into profit or loss. But the reality is far more complex than that.
For a business to be successful in the long term it needs to generate profits, of course. However, focusing purely on profit and ignoring cash flow can be a risky strategy and potentially prevent your business from reaching its true potential.
1. Cash flow provides a clearer view of the condition of your business
Cash flow shows exactly what is going in and out of the business on a daily basis. When looking at company accounts many people focus on profit, as this shows what is left after all expenses have been deducted from revenue. But profit numbers aren’t always straightforward.
Profits can be skewed by a number of factors such as the number of days in the reporting period or seasonal imbalances. Plus, if a business makes a sale on credit terms it may not receive all of that money until months later (or even not at all), but it could recognise the entire value of the sale immediately in its books.
2. Cash flow is necessary to pay employees and bills
Profit doesn’t necessarily mean you have cash available. It is possible for a business to show a profit every month but still not have enough working capital to pay their bills.
If too much money is tied up in assets or accounts receivables it can be challenging for a business to meet their monthly commitments, such as paying employees, rent and utilities.
Without working capital available businesses can fall behind on essential payments and find themselves in trouble.
3. Cash flow sets you up for long-term success
Cash flow, not profit, determines viability. In fact, one of the leading causes of business failure is poor cash flow management.
You can focus on creating excess cash Having profits is important. Profits are one of the things that help create cash. There are other things that can also help you create cash.
4. Cash flow allows for sustainable growth
Whilst business growth sounds positive, if you try to grow a company without the right resources in place it can actually do more harm than good.
Having a positive cash flow allows a business to reinvest in itself and capitalise on new opportunities without putting itself in financial difficulty.
5. Cash flow protects against future financial obstacles
Having a positive cash flow can provide a buffer against future financial troubles. You can never predict when something is going to go wrong. Whether it’s due to an unexpected expense, a customer missing a payment deadline or a company going bust, having some kind of contingency fund available is always advisable.
If you focus solely on profits you may not have the necessary funds to bridge a cash flow gap if it occurs.
If you are a business owner looking for more information on our finance facilities, we’d love to be able to help. Why not give Regency a ring today on 0161 280 4010, drop us an email at lynnew@regencyfactors.com or browse our website for more details on how our facilities work