How To Know the Importance of Initial Cash Flow

Would you like to know the importance of having an initial cash flow? I am tempted to say – priceless; but, as an entrepreneur who had to face the effects of an economic slowdown, I would say that initial cash flow is extremely important. 

The reason - there is a cost for money. Depending upon what role you play in a business cycle, you end up paying or charging for the cost of money that is involved in your business system. If this sounds complicated, let me explain. Money in real terms is never meant to lie idle. It should always be invested in some form of activity that generates interest, income or profit. Thus, in most business plans a calculation of minimum return on investment is made, thereby realizing the value that a sum of money would generate if invested elsewhere.

Now, why are we talking in such complicated terms? Well, it is only to emphasize the importance of cash flow in every business, whether initially or at any point of time thereafter, in the life of a business. Timely cash flow ensures that employees, suppliers, vendors and the government are paid on time. Punctual payments earn respect in business, help develop goodwill and reduce the chances of paying additional costs in the form of interest and/or penalties.

Goodwill is an intangible but highly valued business resource. Goodwill helps develop and grow the business over the lifetime of one person and turns it into an institution. Respect is gained in the marketplace which will prompt more suppliers and vendors to compete for your business. It is also a sign of professionalism; an indication of a business built on a solid foundation. By now, you surely realize how important an initial cash flow is.

Over time, you may have noticed that cash-and-carry shops offer higher discounts and better retail prices than those that accept credit cards or offer monthly credit facilities. This is because the former get to buy goods at a lesser cost since they would also be making payments instantly or within a short period of time and the cost benefit is passed onto their customers, thereby creating an edge over competition.

In cases of new businesses particularly, it is fair to assume that it will not generate income for some time. This further means that the money that has been invested is locked into the business until the time the business starts selling. For the business to be viable, it will not only have to start selling at the earliest, but will have to generate cash flow instantly, or within very short periods of time. It may not be a great idea to extend credit or deferred payment facilities in the initial days of a business, since it will have to make payments to employees, suppliers and vendors; equally important is to pay back the capital that has been invested. In case the owner has managed to bargain credit periods from suppliers, then a timely inflow of cash can be utilized for further expansion of business or other short-term income generating activities.

It is highly essential that cash flows into the business continuously. After all, cash flow is the lifeline of any business.