Understanding Cash Flow
So why is it important for a company to monitor their cash flow?
For startups, a healthy cash flow can make or break the success of the business. Cash flow is important in order for the company to start making a profit. Therefore, it is important for business owners to ensure that they have access to cash in order to start operations. Expenses such as rent, utilities, payroll and office supplies are necessary in doing business. Furthermore, a company needs to invest in inventory or creation of their services to start selling to customers. In addition, fixed assets such as machinery, vehicle and computer units among other will also be needed in the beginning of a company. Without access to a steady cash flow, the company may not be able to start operating due to not being able to pay for these expenses and assets.
There are other business activities that may greatly affect cash flow. To start making a profit, the business owner needs to first create relationships with their customers. At the start of the business, a company may need to invest in expensive advertisement in order to reach their target market. These expenses does not automatically create business for the company. The reach of these ads may take long. Another activity that can affect cash flow is customer relations management. Some companies will decide to give credit lines to new customers in order to build trust. In this case, the operating cycle of the company will greatly affect the ability for the company to liquidate their inventory assets.
For companies who are looking into growing and expanding their business, cash flow maintenance is as vital to their operation as it is for startup companies. Making decisions with regard to funding new warehouses, machineries, vehicles or even branching out will be based on how much available cash the company has.
For example, with Construction businesses, cash flow is one of the most important aspect of their business. Construction business owners need to monitor their cash flow per project to ensure that there will be no delays caused by their inability to purchase materials, payment of rented machineries and most importantly, paying off their subcontractors and employees.