Why is cash flow important?

We are regularly asked why is cash flow important and, to put it quite simply, it's because a business is extremely restricted in what it can do if it can’t pay its bills on time. You cannot pay suppliers based on what you’re owed so you must maintain available cash within your account. This may come from a lending facility that you must live within, for example an overdraft or an invoice finance facility. You can also fund any outgoing payments from profits that are generated or put your own personal money into the business. Either way, being efficient in how you operate and thus minimising the strain on cash is vitally important for any business as cash flow forms the pivotal point of your working capital.

Cash flow is also extremely relevant because it’s the only one of the 3 primary financial statements that can be relied upon to be 100% accurate. Both the Profit and Loss account and Balance Sheet, whilst being very important statements, may be open to interpretation due to accounting adjustments that centre around things such as accruals and prepayments, recording of work in progress, accrued and deferred income, depreciation rates etc. However, the Cash Flow Statement cannot be questioned – you’ve either paid something or you haven’t, you’ve either been paid or you haven’t. It’s amazing how many businesses often leave out a Cash Flow Statement from their monthly MI and only report a Profit and Loss account and Balance Sheet, yet it’s cash flow and cash generation that moves a business forward.

Need help or simply a review of how you currently manage your cash flow, or if you have any questions as to why cash flow is important, get in touch with us by emailing enquiries@elitemi.co.uk.

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