We’ve seen the impact COVID-19 has had on our lives — the good, the bad, and the ugly. Businesses in particular had to deal with their fair share of challenges — protect their employees, manage supply chain disruptions, restructure their business model, target their ideal customers in a new way, and learn the importance of cash flow management.

The impacts of the pandemic continue to reverberate throughout businesses. Along with that, there are other threats looming around the corner — recessions, stock market crashes, inflation, environmental disasters, and more.

That’s why it’s crucial for small business owners, who have less cash reserves than larger corporations, to be diligent about keeping their finances on track.

Below, we look at the importance of cashflow for businesses during economic uncertainty.

What is cash flow?

Let’s start with the basics, namely what cash flow actually means. Cash flow simply refers to the flow of money coming in and going out of a business. It’s important to note that cash flow isn’t the same as sales or profit.

A business has a positive cash flow over a given period when the cash coming in is greater than the amount leaving. Business owners want positive cash flow because it makes it far easier to get accepted for credit (more on that later).

Negative cash flow is the exact opposite — more money leaving the business than coming into it, which makes it difficult for businesses to cover expenses and keep the business running. Negative cash flow can literally sink a business.

Why cash flow matters

A business’ cash position is a good indication of its financial health. Yet cash flow is a problem for many small businesses, with one study by Xero Small Business Insights (XSBI) finding that 9 in 10 small businesses in the UK experience at least one month of negative cash flow per year.

Cash flow is crucial because it allows you to meet current financial responsibilities, make plans for the future, and of course be protected during uncertain times. By balancing inflows and outflows of cash, businesses can also build reserves to protect themselves against economic shocks, not be affected by late payments and provide capital when needed.

Here are a few other reasons why cash flow management is important:

Maintain good business relationships: having a positive cash flow balance allows businesses to pay their people, suppliers, contractors, and employees on time. Especially during challenging times, your people will be grateful for this.

Scale your business: if you want to expand your business by opening up another storefront, or hiring more employees, having a positive cash flow is an absolute must.

Get approved by the bank: even if you have a healthy cash flow, you may still require a business loan from a financial institution. The healthier your cash flow, the more likely you are to get a higher credit limit, or better loan terms, making it easier to make loan payments.

Peace of mind: business owners have enough to worry about it, the last thing they want to be fretting over is their finances. That’s why building a good cash reserve so they have extra cash gives them the ability to plan ahead without the fear of paying the bills. It also allows them to make informed decisions with an eased mind.

Protected during difficult times: all businesses will face some sort of hardship at various points in time. That’s why it’s essential they protect themselves by not only having a positive cash flow balance but also easy access to cash, so they can quickly pick themselves up after a downturn.

How to conduct a cash flow analysis

Before a recession comes swooping in or another pandemic hits, putting your business at risk, you’ll want to have a bird’s eye view of the status of your cash flow. To do this, you’ll need a cash flow statement, which gives you an overview of the flow of cash — the money coming into your business (cash inflows) and the money leaving it (cash outflows).

A cash flow statement shows where there are cash flow issues, such as unnecessary cash outflows or business expenses that could be cut. The three components of a cash flow statement include operations, investing, and financing.

Accounts receivables, accounts payable, and income taxes payable are all included in the operations. For investing, this section includes purchases and sales of long-term investments like buildings, property, or equipment. It can also include sale of businesses, assets, and securities. In the financing section, debt and equity are involved. It also includes the sale of stocks and bonds and cash from a loan or cash used to pay down debt.

In addition to cash flow analysis, an income statement and a balance sheet are an important part of a business’ financial performance review to see if there are any cash shortfalls. An income statement reveals revenues and expenses and helps business owners see where they can decrease costs, or increase revenues, in order to be more profitable.

A balance sheet shows a business’ current assets, liabilities, and shareholder equity. In other words, it shows what a company owns and owes, and the amounts shareholders have invested.

This is where accounting software comes in. Accounting software helps with cash flow management, which includes generating an analysis and producing a cash flow forecast — helping to predict cash reserves, which is critical during times of uncertainty. Accounting software also helps with payment schedule by automatically sending overdue notifications to clients.

Don’t wait until it’s too late

Businesses face a lot of uncertainty, so preparation is key. Take action now to familiarize yourself with your business activity, especially cash flow, because it can literally make or break your business. Having a positive cash flow gives you more freedom, flexibility, opportunities, and allows you to make informed business decisions.

Boost business performance with an accountant

Before times of crisis arrive at your doorstep and it’s too late, seek assistance. Get a good grasp on your business finances and to help you along, start by requesting a consultation right here from one of our London Accountants. Knowing where your money is coming from and where it’s going is the difference between a business that is long lasting versus one that has to shut down.