Why is Cash Flow Vital for Businesses During a Pandemic?

If a business could be compared to the human body, cash would be considered as the oxygenated blood that transports nutrients to every cell in the body. Like the human body with oxygen, a business can function without a steady flow of cash for a little while. Still, a prolonged shortage can cause the system to shut down. The current COVID-19 pandemic has made it pretty tough for ventures – big or small – to maintain their steady flow of cash.

With half of small and startup businesses claiming that they would not survive more than two months of the COVID-19 pandemic, it is alarming to consider the hit these businesses to their liquidity and revenue may take from disaster, as well as the recession that follows. But careful and strategic planning provides the only realistic and viable solution to this catastrophe.

What is cash flow?

It refers to the amount of currency equivalent and cash coming in and out of ventures. Creating profit and value for shareholders require companies to have good and steady revenue. It requires more money coming instead of spending on the operations of the business.

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A stable and positive flow means that firms can increase their monetary reserves. It usually leads to more investments in an organization, dividends being paid to shareholders, the availability of funds to clear credit payments, as well as profit shares.

There are three motivations for cash flow:

Financing

Investment

Operation

Operation refers to the money going in and out because of business activities. Its value is usually positive Investment flow includes the purchases of valuable assets to increase the capital and an organization’s investments in other companies. Financing is generally only a characteristic of big companies, including profits earned by issuing debts, company payments, and equity sales.

The main uses of cash flow

Revenue forecasting is a stalwart of financial reporting since it allows companies to assess as well as predict the organization’s flexibility and future liquidity. It will make sure that businesses can accurately measure how much their financial performance can help their expansion, service or product innovation, overall survival, and diversification.

A profitable flow signals growth in the organization’s liquid assets, allows them to gain the needed flexibility to adapt to sudden changes in the trend and market and take advantage of profitable investments. Without the margin movement, companies can rarely survive the market fluctuations beyond two to three years.

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According to studies conducted by banks in the United States, more or less 80% of failed ventures named revenue issues as one of the causes why their companies failed. It shows the importance of accurate forecasting: a negative flow is a vital red flag of financial trouble ahead. When product suppliers request payment, the landlord announces the impending eviction, or salaries can’t be paid.

A negative revenue will prevent business owners from accessing loans they may need to save their business. As their proceeds are directly linked to their credit scores, the right management is very important; and it starts with accurate forecasting.

Effects of negative proceeds on the company’s performance

To understand how influential even a couple of months with negative proceeds, people need to consider most businesses’ operational systems in the country. There are more or less 20 million, small to medium enterprises all over the country, which account for at least 50 million jobs in the United States.

These businesses rely on the cash proceeds through their daily operations to pay for their worker’s salaries, bills, as well as promotional costs. A diminishing flow can compromise a company’s ability to pay their workers, pay suppliers promptly, settle debt, and pay bills. It will lead to more late payments. It can sink credit ratings, as well as jeopardize their relationship with their landlords, suppliers, and utility providers.

An economic and financial crisis like this COVID-19 pandemic can completely interrupt a company’s revenue. Unless reserves are around, it can halt their growth exponentially. The big question is, “How important is cash during the pandemic?” Ventures like ATM businesses with no steady revenue cannot buy new assets, hire new workers, or take advantage of bulk-buy discounts that suppliers usually offer if advance payments are made.

It can drag a company down the drain in a lot of ways – scarring current and future investors, dampening workers’ morale, as well as making an evolving market service and product trends not available to the company.