Advantages of Cash Flow for MSMEs

Introduction

Cash flow is an integral part of your business, and though the name seems pretty straightforward, the concept of cash flow is complicated. A properly managed cash flow is the first step towards better business and growth. So understanding the advantages and disadvantages of cash flow is necessary to succeed and sustain your business in the long run. 

Advantages of Cash Flow for Your Business

Understanding the benefits of cash flow is necessary before comprehending how its management will increase the impact of its advantages. 

1) Better Lending and access to capital: Though it seems counterintuitive, good cash flow can give you access to better lending options. It can showcase the financial strength of your organization. Moreover, you will have wider access to cash flow-based credit solutions like CF Pay Later by CredFlow, which will give you a credit limit of Rs.30,00.000 that you can use to do vendor payouts. It needs no collateral as it is a cash-flow-based solution. 

2) Expand Business with good cash flow: A good and healthy cash flow in your organization would help you manage your operations efficiently. Whether it is your working capital or vendor payments — with good cash flow, your product inventory will grow, giving you more opportunities for the expansion of your business. Also, you can negotiate better prices with timely vendor payouts. Thus, you can position yourself better and negotiate discounted prices with your vendors. Therefore, good cash flow will help you get the capital you need to grow your company. 

3) Reduction in running debts: A good cash flow will help you reduce previous debts that you have to incur during the initial phase of the organization, i.e., to pay for salaries, wages, and all the other necessary expenses. 

What is a Cash Flow Statement, and Why do you need one                                                               

A cash flow statement is a financial statement that defines the spending of cash during the accounting period. It will give a brief overview of the sustainability of your operations in long and short-term durations. There are three sections of a cash flow statement:

  • Operating activities: It will detail the cash flow generated through revenue and expenses.
  • Investing activities: It will record the cash flow from the sale and purchase of assets through free cash (cash that does not include debt).
  • Financing activities: It is the detailed cash flow from both the debt and equity financing. 

So addressing the elephant in the room, why do you need a cash flow statement? 

  • Spending insights of your organization: With a cash flow statement, you can get a deep insight into your business expenditures. Expenses like loan repayment do not reflect on the profit and loss statement, but comparatively, this information will be present in the cash flow statement. 
  • Brief Expense Planning of your organization: As an organization, you need to understand how much cash in hand you need to run the business. Thus, with a cash flow statement, you can analyze these expenses and make your operations efficient. 
  • Financial Planning of your Business: Long-term planning is necessary for the sustenance of your organization. Thus, the financial manager can make efficient strategies for cash flow management through cash flow statements. It will help them to identify changes in the cash needs of your organization and thus make a longer strategy needed for cash management. 

Conclusion

Thus, your cash flow is an essential pillar in your organization — helping your organization to navigate through difficult economic situations. Creating cash flow statements is critical to place your organization in a strategically advantageous position by ensuring you always have good working capital.

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