Why is Cash Flow Important?
In 2000, in the wake of the dot-com bust, Amazon was forced to sell almost $700 million in convertible bonds to investors abroad. In fact, the company had to offer an extremely interest rate (7%) just to complete the deal. A month after they closed the deal, the market crashed. In essence, assuming Jeff Bezos and his team did not make that strategic move to increase cash flow, perhaps, eBay would still be ruling the online retail space.
There are so many lessons we can draw from the short story above, but the most important one is that cash flow is an important piece in any jigsaw. Just to make sure you are clear on the details of this discussion, we’ll take the time to explain the concept of cash flow.
What is Cash Flow?
Cash flow is to a business what blood is to humans. Basically, it comprises your revenue and your expenditure. Cash flow includes the money coming in from customers, clients, stakeholders, investors, etc. it is also the amount you spend on rent, loan payments, wages, etc. Just think of it as the lifeblood of your business.
What happens when you donate or lose more blood than you have? Well, the same thing happens to a business, it dies! Now, let’s go on to see why cash flow is important.
You Need Cash Flow to Start a Business
What would you say is the most important factor to consider when starting a new business? Visionary co-founders? A good team? A million-dollar idea? Or a nice office space? All these are wrong! Without cash flow, your smart cofounders in their fancy office will not be able to work on their million-dollar idea. It is just not possible.
In several venture capital meetings, the investors assess your cash flow statement before they make the decision whether or not to invest in your company.
Cash Flow is Integral to Growth
Although Facebook wouldn’t have taken off if Mark didn’t receive a lump sum from his friend’s father, the heavy investment by venture capitalists is what helped his company to grow. The same goes for Tesla, Apple, Google, etc. any company you can think of.
Cash flow is what enables the building of new locations, investment in research and development, aggressive marketing campaigns, sophisticated technology, and even hiring top talents. When your cash flow is in the clear, you can begin to operate your business in a strategic and proactive manner.
Cash Flow Determines How Flexible Your Business Is
A major client offers to buy a million dollars’ worth of goods, but he needs it delivered in good time. Unfortunately, the only way to convince banks that you are capable of handling such a deal is your cash flow. If the inflow and outflow of your business are not that impressive, then you can as well think of that deal as gone.
Let’s not also forget that cash flow is what keeps a business operation going. Your cash flow will influence several financial decisions you will take and will also dictate the course of your business. In essence, cash flow is one important concept that you cannot afford to ignore.
How do I know if I’m paying too much?
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