10 Crucial Reasons Why Cash Flow is Important for Small Business

10 Crucial Reasons Why Cash Flow is Important for Small Business

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From my experience of working with clients as a chartered certified accountant focusing on cash flow management and improvement across various sectors, such as dental practices, marketing agencies, retail, e-commerce, art galleries, and travel agencies, I have observed the direct impact of cash flow on both their business and personal life.

According to the research conducted by Xero published on Heather Smith site,

 I quote

Cash flow issues have led to significant consequences, with 45% of business owners unable to pay themselves and 22% struggling to pay bills. A staggering 58% believe these challenges have negatively impacted their personal well-being, manifesting as stress (84%), anxiety (79%), and sleepless nights (64%).

Data shows how crucial it is for a business owner to understand the importance of cash flow for business and personal reasons.

Therefore, in this new practical guide, I will share detailed real-life case studies with you to illustrate the importance of managing cash flow across different stages of your business.

But why would you trust me as a guide on this topic?

For the last two decades, as a Chartered Certified Accountant turned  cash flow specialist, I have helped hundreds of clients to improve their cash flow. I have been featured in major sites like QuickBooks Online, Independent, Zoho, and Floatapp on this very topic.

I review my clients’ cash flow statements and profit and loss statement to devise a plan of action to fuel long-term business growth. I do this all day, every day, for a living. So, don’t worry. You are in safe hands.

Managing cash flow involves understanding the amount of cash available, operating costs, and how to pay your bills on a day-to-day basis.

So, by the end of this article, you’ll have a deeper understanding of why cash flow is important to you and 10 areas you need to focus on.

Key Takeaways

  • Cash Flow is Crucial for All Business Stages: Adequate cash flow is essential for starting, growing, and sustaining businesses at every stage of their development.
  • Decision-Making and Financial Health: Effective cash flow management empowers informed strategic decisions and maintains the financial health of a business.
  • Builds Business Resilience: Strong cash flow management is key to building long-term resilience, allowing businesses to weather financial challenges and invest in growth opportunities.

Lets dive in.

Whether you’re:

      • A startup looking to get your business going

      • A growing business looking to scale the business faster

      • A mature business seeking financial stability

    Cash flow significantly impacts your business journey. Poor cash flow can mean the difference between success and failure for your business.


    If you are a start-up, then sufficient cash flow means whether your business gets off the ground or not.

    Did you know?

    9 out of 10 startups fail. Multiple sources, including Investopedia and Startup Genome report, point towards this. Further, as per the National Business Capital and Services “2019 Small Business Failure Rate: Startup Statistics by Industry” report, as of 2019, startup failure rates were around 90%.

    Per this report, 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year. Yes, it is that tough to survive in the business. Of all the businesses that fail, 82% fail due to cash flow problems.

    Negative cash flow in the early stages can quickly deplete your reserves, making it even harder to overcome initial hurdles.

    Understanding the amount of money flowing through your business bank account is crucial for survival.

    It’s a reminder of how many start-ups survive the brutally competitive world of running a business.

    It reminds me of one of my clients who built software to simplify operations and marketing for art galleries.

    His Problem?

    Insufficient cash flow to invest in building the software and, further, being unable to fund the project from external sources means that the software never took off the ground.

    It takes more time and cash than expected before the business starts generating a profit. This means you need more cash flow than you initially budgeted. So, if you don’t have an alternative source of cash inflow during this phase of establishing the business, your business can come to a halt.

    I experienced this when I wanted to launch this cash flow hub.

    It took longer than I expected, and I couldn’t put my energy into other cash-generating activities because it took so much energy and focus. Not to mention, keeping on top of your cash flow and ensuring there are funds available in your business bank account is vital during such phases.

    Furthermore, an entrepreneur is in the business for ten years, like a marathon, not a sprint of one year. And, during this long entrepreneurship journey, every business, at some point, goes through a cash flow rollercoaster.

    One month, there’s a bump in cash flow, and the next month, the founder worries about whether he has enough cash to pay the bills on time, illustrating the importance of short-term cash flow issues in maintaining business continuity.

    Growing Business

    Things do not get better if you have survived the start-up phase and are currently in the growth phase.

    Here’s the thing.

    Business Growth Demands Cash Flow- Shishir Khadka

    As your business grows, so does the need for more cash as operational expenses and tax liabilities increase.

    It reminds me of one my past clients selling luxury goods, operating expenses increased by 17% year on year. As a result of this increase, his closing cash balance required at the month’s end to cover at least the next 12 weeks’ cash outflows also increased proportionally.

    This means that when this business had £550k at the closing balance, it had a comfortable balance. When the operation costs increased, £550k wasn’t a comfortable balance as it only covered one and a half months of expenses to pay.

    This is how, as your business grows, it becomes like a cash-eating monster, and understanding the financing and amount of money needed is crucial for growth.

    Mature Business

    If your business has been in existence for more than ten years,

    Things do not get easy cash flow-wise.

    Those who survive, according to experience working with established businesses doing multiple seven figures, are always in constant battle with cash flow. Squeezed margins because of competition, investing in capital expenditures eats cash in the business.

    From my observation, many small and medium-sized enterprises collapse because they do not have a cash flow cushion. Even big billion-dollar companies with huge assets and customer base experience this.

    Unexpected expenses can disrupt even the most well-planned budgets, emphasizing the need for robust cash management.

    Do you recognize these names? Gold’s Gym, Virgin Australia, Debenhams, DW Sports.

    All have filed for bankruptcy or in administration in the not-too-distant past. All of them have a massive presence. They sell a lot. They have existed for a long time. Still, they came to a point where they had to file for bankruptcy.


    Because they did not have enough cash flow as a reserve to support the business when there were no sales due to the pandemic, it shocked them, like every other business owner.

    Cash flow problems are not unique to you. Almost every business owner faces them at some point in their business journey. So, when you experience a cash flow rollercoaster, know you are not alone. Don’t let cash flow problems become too big when you experience cash flow problems.

    Cash is king is a way of saying that nothing is more significant in the business than cash.

    We can’t pay a supplier using turnover or profit. We need cash for it. We also need cash to make investments in the business.

    Now, you know the importance of cash flow across all stages of the business journey.

    Next, I will share with you ten reasons why cash flow is important so that, depending on the stage of your business journey, you can focus on the areas that need attention to ensure you have a healthy cash flow.

    Before I do that, let me share with you a common mistake business owners make.

    From my experience, I have come across business owners who get confused between profit and cash flow.

    Here’s the problem with that.

    Cash flow doesn’t include non-cash expenses like depreciation, amortisation, etc. In addition to this, debtor balance means nothing until cash is collected.

    Observe this discussion between a founder and his team to understand it better.

    Founder: “How much money did we make this quarter?”

    Team member 1: “We made £100k revenue and £25k profit.”

    Founder: “OK, great, let’s invest £20k in marketing. £5k to build funnels, and £5k each for running Facebook, Google, and YouTube ads.”

    Team member 2: “That’s awesome. Let’s do it.”

    Team member 1: “Wait, we don’t have £20k cash in the bank even though we made a profit of £25k.”

    Founder: “What? How come?”

    Team member 1: “Some of our customers pay in instalments, and some cash is not collected yet as it is tied up in debtors. So we don’t have £20k, let alone £25k.”

    We can’t spend profit. We need cash.

    This conversation helps us realize how cash is king. Cash is the only thing that keeps your business going when it matters most.

    So , whether you are a new business growing or established, here are the 10 reasons why cash flow is important to the financial health of your business.

    10 Reasons Why Cash Flow is Important ?

    1. Ensures Business Solvency

    Cash flow is the money that moves in and out of your business and it’s essential to stay solvent.

    I remember how one of my clients, who has been in business for eight years, was doing £4.4m in revenue a year. Suddenly, there was a cash crunch, and he sent me an email very early in the morning saying,

    Where is my cash Shishir? It’s all gone. What is my next move?”

    The level of cash balance was so low that his business was not solvent. His daily operations came to a standing halt. He was concerned his business would go bust.

    We worked on his business to fix the causes of his cash flow problems. This work prompted me to write this beginner’s guide on cash flow management.

    Building a solid cash flow foundation is crucial if you want to go further in business. To do that, understand the importance of cash flow in your business and believe it is the most critical metric for any business.

    2. Facilitates Better Financial Planning Decisions

    Maybe you’ve identified a gap in the market you want to address or solve a problem that millions face. To do anything like this, you need cash. The bigger the vision and mission, the bigger the cash flow needs.

    Your social media followers, connections, google rankings, public speaking skills, or podcast downloads don’t matter when you don’t have the cash flow.

    To support your business planning, you need better financial planning, and to execute financial planning, you need to have cash flow intact.

    To do this, you need to be able to create a cash flow forecast so that you can plan for business growth and identify potential cash shortfalls.

    It reminds me of one of my clients who sells toys on Amazon. One of the crucial parts of this was buying inventory in bulk.

    I prepared a customised cash flow forecast template to record planned outgoing cash for buying inventories and also record planned cash inflows. We wanted to optimise cash spending, ensuring not much cash was tied up in inventories. This means that any surplus cash was re-invested in other areas that need attention.

    This financially disciplined approach ensured an adequate cash balance most of the time. It helped him to make better-informed business decisions.

    3.  Support business growth and expansion while maintaining working capital

    Have you come across a situation where you need to make capital investments like buying new computers or furniture for a new staff member you have just hired? All of these are business expenses that require money.

    As your business grows, business expenses increase. From spending on daily expenses like stationary and travel to spending on big things like a new website and marketing. Maintaining adequate cash to cover working capital to meet your financial obligations will be key to grow your business in a sustainable way.

    4. Enhances Creditworthiness for Borrowing

    I believe a good time to borrow from banks is when you don’t need it. When your business has positive cash flow, from a bank point of view, you are less of a risk defaulting the loan.

    So you can secure the loan at cheaper loan rates.

    This is important. There is a saying in business growth.

    He who can spend more, wins.

    For example, you can run Google ads for 3 months and not expect ROI, while your competitor can’t. Then obviously you will get more clients and grow your business faster, as you are in constant attention of your ideal clients.

    5. Helps in Crisis Management and Resilience

    Cash flow is the energy reserve that helps you survive when running low on money energy in the business ultramarathon. It helps you survive when you cannot get the money from outside, like in times of crisis or when your sales are slower than expected.

    But a resilient business considers the worst when building its cash flow reserves. As a result, they manage to survive even in unfavourable situations like the COVID-19 pandemic.

    6. Enables Timely Payment to Suppliers and Employees

    Have you ever had a moment where your suppliers send you reminders to pay?

    I know, it’s not a nice feeling. I have been there in the past.

    When you make timely payments to your suppliers and employees on time, you keep the people you work with happy.

    If you start making late invoice payments then you do form a reputation of a bad payer, which could result in suppliers not working with you or even your employees leaving you.

    You cannot build a business on your own, right?

    7. Attracts Potential Investors and Partners

    One of the reasons for the cash flow importance is that If you demonstrate that your business is highly profitable and cash-rich, you will attract potential investors and partners.

    If you are in a dilemma of whether to go for lenders or investors to support your business growth, then you could bring a partner with a different skill set to fix the knowledge gap. This way, you could further streamline your business operations by capatilising on each other’s strengths and skillset.

    This will result in reduced costs of running the business.

    Furthermore, your business do not potentially need debt funding as you will be sharing the equity with the partner. This means that you will be have to pay no or less interest expenses thus increasing your profit margin. It further acts as an attractive investment proposition for future potential investors.

    Collectively you both will be able to make joined-up up informed business decisions.

    8. Provides Flexibility in Operational Decisions

    A strong cash position provides flexibility in making operational decisions.

    For example, one of my clients, who runs a brick-and-mortar business selling luxury furniture, invested in hiring a product manager on a yearly salary of £60k for eight months to develop a new product range for selling beds, adding another source of income.

    So for eight months on £5k a month, my client has no extra income from sales of new products. During this eight month period his net income went down because of the extra spends.

    However, he knew it would take time to research the market, source the project, market it and sell it.

    He had a vision of his company’s long-term success. So he took a hit on short-term hit for long-term gain.

    Fast forward 14 months later, he had made an extra £259k net income as a result of adding a new product line.

    9. Reduces the Need for Excessive Borrowing

    You are in a strong position when you have an adequate cash balance to cover debts, expenses, taxes, and operation costs. This means you do not need to rely on excessive borrowing.

    This will reduce your borrowings and, hence, the interest payments.

    This happened to one of my clients where we reduced the use of the £2.5m overdraft facility, paying 7.5% interest rate to 4.5%, and used only 575k of overdraft facility.

    This accounted for a saving of £43.5k in interest expenses in a year.

    10. Allows Investment in Research and Development

    You can invest in R&D and test projects when you have excess cash. By doing this, you are testing your new product launches and testing the market.

    This is important because you need to innovate and stay competitive in the market.

    Your Next Step

    Let’s have a conversation in the comment section below

    Which of the ten areas I shared above must you tackle first? Let me know by sharing in the comments section below.

    Cash Flow Quiz

    Also, if you are concerned about the health of your cash flow, take my assessment of how healthy your cash flow quiz and get direct, actionable feedback from me to improve your cash flow. 

    Take the Quiz

    Curious to find out how healthy your cash flow is? Take this quiz. In less than 60 secs, it will show your situation and the steps you can take to improve.

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    Shishir Khadka, qualified as a chartered certified accountant in 2009. He is the creator of cashflow hub– the world’s most comprehensive cash flow resource online and is one of the UK’s leading cash flow specialist who helps busy business owners and entrepreneurs generate more profit and create consistent positive cash flow without over relying on getting new sales.

    He has delivered a masterclass to a global software Zoho’s audience to create consistent cash flow. He has written articles for floatapp– one of the leading cash flow software and has also been featured in the major publications such as Independent. He has been sharing his learning and insights on his youtube channel.

    He wrote about his learnings from helping an e-commerce client scaled the business cash flow positive from £500k to £1.6m in four years in “The Three Key Obstacles to Faster Growth: How You Can Overcome Them Using Cloud Accounting.

    In his career spanning 18 years as the cash flow specialist, he has helped businesses of all sizes, ranging from £40K to £40M.

    10 Crucial Reasons Why Cash Flow is Important for Small Business

    By Shishir Khadka, FCCA.