The Importance of Cash Flow

Just because a business is profitable does not mean it cannot run out of money. Making profits is not the same as maintaining liquidity but both aspects of business finance are essential to commercial success.

Pressures on profits are not the same as pressures on cash flow. A business can see its margins squeezed and profitability fall but if it has a reserve of cash it can continue to trade. But a business that runs out of money will encounter serious difficulties even if it is able to make a generous profit on everything it sells.

This is why every commercial organisation needs to take care that it is managing both its profitability and its liquidity. Accurate records need to be kept of both along with detailed and realistic projections or forecasts for the short and medium-term.

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Why Profit is not Cash

A new business or a business looking to extend its operations usually needs an injection of business finance. Setting up costs – new equipment, new premises, marketing materials – are usually paid for before much income is generated.

So even a business that is profitable from the day it opens already has the potential to be short of cash. It is usual for suppliers to require payment before customers settle their bills and that money has to come from somewhere.

Some businesses are paid in stages during a project that can last for months but they have operating expenses that need to be settled monthly. It does not matter how profitable a project might be: if there is no money in the bank at the end of the month to pay staff the work will stop.

Organisations need to forecast their cash flow to identify when they might be running low. They also need to find ways of overcoming these liquidity gaps.

Potential Solutions to Cash Flow Problems

During the day-to-day routine of running a commercial operation it is easy to lose sight of the cash situation. But running out of money is a very serious problem and it can start a chain of events leading to insolvency and business failure.

There are a number of precautions that a business can take against impending cash flow problems. These include:

  • Improved credit control, maximising cash received from customers
  • Tight restrictions on purchases and payments to suppliers
  • Establishing flexible funding solutions such as Invoice Finance
  • Taking advice from experienced third parties

Services Available from Touch Financial

We provide a free and independent service to UK organisations looking to resolve their business finance problems. As the UK’s leading commercial finance broker we bring together organisations looking for money with funders looking to lend.

Over the years our team of expert advisors has helped literally thousands of UK organisations to get access to funds quickly and cost-effectively. We use a carefully selected panel of leading funders that includes banks such as Lloyds TSB Commercial Finance.

Our service is free because our fees are paid by the funders. We are entirely independent of all the funders and our internal structure ensures that our advisors give you impartial information and advice.

We focus on the needs of our customers and we want to build long-term relationships with them.

If your organisation is looking at ways to address potential liquidity issues we are available for a no-obligation consultation. It will only cost you a few moments of your time, so why not get in touch with us today?

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