The importance of cash flow

Mo and Emma look at what cash flow is and why it is important for their business

Cash doesn’t just mean the physical money a business has in notes and coins. It also refers to cash in the bank – in other words, money that is available in the business’ bank accounts.

The management of cash is very important as cash allows a business to pay its bills. The main cash payments a business makes include:

  • payments to suppliers
  • payments to employees
  • overheads, such as rent, electricity and telephone bills

When a business has just a few large customers and they fail to pay on time, the business’ cash flow position is badly affected because the business does not have money it was expecting to have. This can lead to the business having financial difficulties and even failing.

A business can arrange credit terms with its suppliers, in order to pay for raw materials or stock at a later date. Credit arrangements can also allow customers to pay for products or services within 30, 60 or 90 days. If a business allows its customers credit terms, it is a sensible option to also negotiate longer credit terms with its suppliers.