Cash flow is extremely important for businesses as cash flow allows for businesses to run smoothly. The lack of cash flow can spell disaster for businesses. Rogers (2014) noted, “Nothing is as important to a business as a positive cash flow.”
What is Cash Flow?
Cash flow can be defined as “…the net amount of cash and cash-equivalents being transferred into and out of a business” (Kenton, 2019). Specifically, businesses desire to have positive cash flow. negative cash flow will have negative effects on the business. Rogers (2015) noted the importance of business owners managing a business’ cash and Kenton (2019) noted that cash flow can be used to measure the overall health of a business. Rogers (2014) noted, “The goal of good cash management is obvious: to have enough cash on hand when you need it.” Cash flow must be sufficient enough to meet the needs of the business at all times (Rogers, 2014).
Cash Flow and Business Success
Positive cash flow helps ensure business success. Positive cash flow enables businesses to pay expenses and settle debts, pay shareholders, and reinvestment in the business (Kenton, 2019). Further, Kenton (2019) stated that positive cash flow allows for businesses to save in case of challenges in the future. Rogers (2014) noted uses of cash flow include loan payments which may or may not include both principal and interest, rent, insurance, and taxes. In addition, business owners can use positive cash flow to make further investments and in case of difficulties within the markets positive cash flow allows for businesses to stay afloat during financial downturns. (Kenton, 2019). These are a few positive effects of a business having positive cash flow which ensure that businesses can run smoothly and be successful.
Cash Flow and Negative Consequences
Rogers (2014) noted that negative cash flow means that a business is not able to purchase inventory, pay bills and utilities, or make payroll expenses. Negative cash flow may mean that the lights get turned off. Negative cash flow can push businesses into insolvency (Rogers, 2014). Potential downturns in the market could easily cause the loss of the business if there is no cash flow to count on during difficult times (Kenton, 2019). Investors potentially may lose all of their investment monies (Kenton, 2019), as well as, the entrepreneur especially if they have bootstrapped their business venture (Rogers, 2014). These are a few of the negative consequences when a business does not have the appropriate amount of cash flow.
To sum it up:
Cash flow is extremely important for businesses as cash flow allows for businesses to run smoothly and the lack of cash flow can spell disaster for businesses.
References
Kenton, W. (2019, August 28). Cash flow. Retrieved September 05, 2019, from https://www.investopedia.com/terms/c/cashflow.asp
Rogers, S. (2014). Entrepreneurial finance: Finance and business strategies for the serious entrepreneur. Place of publication not identified: McGraw Hill Education.