Effective Cash Flow Management is a Key Factor in the Success of Businesses

Most startups fail within the first five years. Studies have revealed that improper cash flow management is one of the primary causes among 60 percent of failed small and medium-sized ventures. While every business entity faces financial peaks and valleys, startups are more susceptible to cash flow gaps as they have limited capital.

Effective management of working capital is crucial to a business’s fundamental financial stability and operational success. The ability to utilize cash flow management to maintain a perfect balance between liquidity, profitability and overall business growth is a hallmark of a good business management strategy. Here is why improving cash flow is a crucial factor when it comes to the success of your business.

Streamline operations

Efficient cash flow management helps maintain smooth business operations, and this could mean more revenue and a higher level of your company’s profitability. To effectively maintain the recommended cash flow, you must implement a robust strategy for inventory management and strike a perfect balance between accounts receivables and accounts payables.

The primary goal of working capital management is to maintain a healthy cash flow cycle, minimizing the cost of the capital spent, and optimizing the returns on all current assets investments. Simply put, your business needs to collect the money it owed and maintain the right level of cash daily to finance all day-to-day bills and other regular expenses.

An indicator of efficiency and overall financial health of a business

Generally, your business cash flow status is a reflection of the results of different business activities, including debt management, revenue collection, payments to your suppliers, and even inventory management. Note that cash flow varies from one business to another and industry to industry due to several factors such as variations in collection and payment policies, the probability of a business having to write off part of its accounts receivables, the timing of significant assets acquisition, and in some cases, the specific capital-raising strategy a business is undertaking.

Solvency and a business’s creditworthiness

To banks and other financial institutions that advance credit services to business, a positive cash flow implies that the company has maintained a steady and predictable cash stream. Lenders prefer offering credit services to such borrowers as they’re sure of getting repaid.

Besides, your business’s cash flow stability contributes to its overall credit score. Companies with an outstanding credit rating are likely to raise better capital in the open market and sometimes get foreign investments quickly. Now you understand how effective cash flow management can be leveraged to fetch humongous benefits.

Cultivating better vendor and worker relations

By timing the receivables and payables effectively, a company will always honor the vendor obligations in time. This will create a positive and lasting relationship between various stakeholders. Besides, it will be possible to negotiate better terms of credit with a satisfied vendor.

Wrap up

Think of cash flow management as a water tank – water flows in at the top (money comes into your business) and drains out at the bottom (these are the business expenses). So, to keep your water tank full, you need more water coming in than draining. End of story.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.