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WHY CASH FLOW IS SO IMPORTANT?
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- Cash flow is the LIFE-BLOOD of a business.
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- A business might be profitable but not necessarily liquid.
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- For a growing business, for expansion purposes, cash is especially require to pay for salaries ( higher head count), more rental or storage space, payments to suppliers whether for raw materials or other types of expenses.
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- Cash flow is also for business survival. A profitable company which has a lot of accounts receivables/trade debtors but collections are poor cannot pay in time to the staff and suppliers may not be able to survive. Due to deteriorating cash flows, suppliers will stop delivery of goods or services, existing suppliers which have been owed for a long period of time will pursue legal action to wind up the business or the business needs to pay more cash/higher costs for the goods or services to pay the suppliers as their suppliers no longer grant them proper credit terms.
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WHAT IS CASH FLOW?
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- Simply, refers to cash moves in and out of the business on a regular basis.
Cash moves into the business when payments are received from customers or when new funds are invested in the company by its owners.
Cash moves out when the business purchases supplies for cost of goods old, or pays for operating expenses like rent, salaries, etc. ,buys new capital assets like machinery or payment of taxes, etc
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[ Please refer to my earlier article on Profit Versus Cash ]
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