What can my cash flow tell me about the overall health of my business?
If there’s one figure you know in your business, I expect it’s your bank balance. And it’s a pretty important one.

But alone, it doesn’t give you any information about what’s happening in your business. We regularly speak to our clients about their cash flow forecasts at Graceful Accounting because they are such a crucial part of the financial picture. Cash flow hasn’t traditionally been part of the service business owners expect from their bookkeepers and accountants. Still, as technology has changed, it’s so simple for us to plug your account data into a forecasting tool and give you even more profound, real-time insights into what’s happening in your business. But why would you need that?

In this blog, I’ll share what your cash flow can tell you about your business.

What do you mean by Cash Flow?
Cash flow is the net amount of cash and cash equivalents moving into and out of your business. It’s a critical indicator of your business’s financial health. Understanding the nuances of your cash flow can help you make informed decisions, predict issues in the future, and run a more financially stable business. Here are some of the insights that your cash flow can provide about the overall health of your business:

Operational efficiency
You have positive cash flow if you have more money in than out. This indicates that your business is generating more money than it is spending. This is often a sign that your business operations are running smoothly and efficiently. Conversely, a negative cash flow might indicate operational challenges, such as high costs, poor inventory management, or inefficient processes that could drain your resources.

Financial solvency
If you haven’t got cash, you can’t meet your financial obligations – no matter how profitable you are. A consistent positive cash flow suggests that your business is solvent and can comfortably pay its debts, salaries, and other operational expenses on time. If you find your business frequently struggling to cover these expenses, there’s a problem – and your bookkeeper or accountant is a great person to help.

Growth potential
This isn’t about how much money you have coming in. It’s about where your money is coming from. Analysing where your cash comes from can tell you much about your business’s growth potential. For instance, reinvesting cash into business activities like marketing, product development, or expansion can indicate a strategy geared towards growth. If your cash flow is healthy, you’ll have more flexibility to invest in new opportunities. If it’s not, you won’t.

Investor and lender attractiveness
If you’re looking for debt, investment, or even the opportunity to sell your business in the future, your cash flow is vitally important in making your business attractive to investors and lenders. They often look for businesses with positive cash flow, as it suggests a lower risk of investment.

Market conditions and consumer demand
Your cash flow can also reflect broader market conditions and demand for your products and services. For example, seasonal variations in cash flow might be regular in your industry. Still, out-of-the-norm variations could indicate a need for better cash management or a change to your business model to accommodate changes in the market.

Conclusion
At Graceful Accounting, we care so much about your cash flow because it shows the long-term viability of your business. Patterns of steady, positive cash flow over a long period indicate that your business model is sustainable. On the other hand, if cash flow problems persist, it might be a sign that you need to make fundamental changes.

And if you’re anything like our clients, you’d like to foresee problems ahead as soon as possible.

We regularly review our clients’ cash flow to equip them with the knowledge to make proactive adjustments. We want your business to be robust and responsive to internal and external pressures. If you’d like to talk more about your cash flow, book a call with us today.