5 Reasons Why Cash Flow is Important for Small Businesses

Cash flow statements equip businesses to assess and understand their financial health more effectively. These statements closely track the inflows and outflows of cash, enabling owners to identify customer buying patterns and make informed decisions about the future of their business.

Take a growing consulting firm, for example. This type of business can experience periodic spikes and lulls in cash inflows as it onboards new clients, completes projects, and waits for invoices to be paid. When analyzing its cash flow statements, the business may notice that certain types of clients take longer to pay their bills, resulting in temporary cash crunches. Armed with this knowledge, it can negotiate better payment terms upfront or set aside surplus funds from faster-paying clients to bridge those gaps.

Perhaps most important, the visibility afforded by the cash flow statement supports the firm to make strategic decisions about its future growth. It can pursue new opportunities, knowing its cash flow projections can support the necessary hiring, equipment purchases, and other expenses. Conversely, periods of anticipated cash flow strain might prompt them to postpone discretionary spending or look for areas to cut costs temporarily.