Why Is Cash Flow So Important For A Company’s Existence?
Whether you are a manufacturer, retailer, distributor or service provider, it is important to know and understand the internal and external factors that can impact your cash flow.
In particular, it is necessary to understand which factors have a direct connection with your accounts receivables and affect cash flow.
Cash is ultimately king because your business could be making a lot of profit, but be low on cash, or have a strong cash flow yet not be making significant profit. The fact is you need money to invest in raw materials, handle staff wages and other overhead expenses in order for your business to operate.
Unless you have working capital this is not possible.
Cash flow begins when a business is established. With the initial cash, purchases are made, inventory is moved and promotional activities are carried out. After your business enjoys some sales, your customers pay and when you receive this, you get the cash in hand to use for expenses, supplier payments, loans, etc. The cycle goes on.
As the business grows, there comes a time when the cash is not enough and that is when it looks for alternative methods to pump in cash. This can be by offering customers a cash discount to pay earlier. This means sacrificing some profits. Vendors can be requested for longer credit terms.
Then there are banks that can grant a working capital line of credit, though for this you must put up assets as security and offer personal guarantees.
As the business grows, it needs a continuous flow of cash for various things that could be routine as well as seasonal – like capital investments, machinery, premises, vehicles, etc. all of which must be paid for on a monthly basis with interest.
So here’s a look at the common factors that affect cash flow; while not all may be applicable to your business, you could probably add a few more, based on your unique business situation:
- Raw material: Supply delays, sudden price increases and defective material
- Suppliers: with cash flow problems, tighter credit terms
- Outsourcing to Unsuitable firms
- Within the business: defective goods, poor infrastructure, unplanned inventory, design problems, delayed deliveries, low sales, selling on credit, labor problems, fraud, obsolete technology, bad financial and staffing decisions, slow moving inventory, employee shortage, lack of expertise and equipment for a specialized job, wrong pricing,
- External: competition, economic fluctuations, changes in law
Most of the above can be overcome by reworking sales techniques or pricing structure, but the other factors are not that easy.
In addition to this there are certain items that affect cash flow from accounts receivables like competition, written sales and collection policies, customer treatment policy, level of qualifications of those involved in collections, lack of proper infrastructure to handle cash flow efforts, cooperation of sales staff to cash flow, support of top management towards cash flow, etc.