Skip to main content

Impact of Cash Flow on Business Stability

Having the opportunity to start, run and grow your own business is one of the most basic elements of living in the U.S. and can be a key contributor to building wealth. However, starting a business is a somewhat risky venture that typically involves putting either your money or your credit at risk. As such, aspiring entrepreneurs would be well advised to pursue an advanced degree, like a Master of Business Administration (MBA), first to help enhance their knowledge of running a successful business before actually putting themselves at risk. In particular, one of the most critical areas to learn about is how to maintain and optimize the cash flow of your business.

Breaking Down Cash Flow

The saying “cash is king” rings true for any business, regardless of size. Cash is the lifeblood that flows through your business, keeping you, your employees and your bills paid. If your cash flow suddenly dries up for any reason, your business could cease to exist practically overnight.

Investopedia defines cash flow as the net amount of cash and cash equivalents going in and out of a company in a given period, which should not be confused with revenue or net income.

Revenue is the total income generated from the sale of goods or services. Since it comes first on an income statement, revenue is typically known as a company’s “top line.” Net income is a company’s total profit has earned after deducting all its expenses. Since it comes at the end of a company’s income statement, cash flow is typically called its “bottom line.”

Cash flow, on the other hand, is all the money that comes in and out of your business over a certain period. Cash flow is a broad metric encompassing both revenue, expenses and net income. For this reason, it’s usually further broken down into metrics like cash flow from operations, working capital, cash conversion cycle and more.

According to Chron, the four areas that will be hurt the most by cash flow issues are:

  1. Operations
  2. Finance
  3. Investing
  4. Stability

For aspiring business owners or upper-level managers, it’s critical to understand how cash flows in and out of these different sectors as well as its impact on the business.

Staying on Top of Cash Flow Planning

In a perfect world, your business would generate tons of cash, always be paid immediately by customers and would never have a customer fail to pay you. But, in the real world, interruptions to your cash flow happen all the time.

Here are just a few examples of scenarios that could potentially disrupt a business’s cash flow:

  • Funding an expansion: Businesses often need to deploy a lot of capital upfront in order to hire new employees, open new offices or develop new products. Usually, the company won’t see a return on this spending for months or even years.
  • Unexpected emergencies: At any moment, issues can arise with your supply chain or product costs that can drastically impact the business’s profitability.
  • Late payments: In many cases, companies might extend a product or service upfront without getting paid until weeks later, if at all. For example, Buy Now Pay Later services let customers delay payment out into the future.

Luckily, there are several strategies that managers can deploy to help companies stay on top of their cash flow planning. Business News Daily recommends the following:

  • Don’t wait to send invoices: Billing customers upfront, or at least within 14 days, can help raise the capital your business needs to pay its employees and bills.
  • Keep tabs on your inventory: There’s plenty of room for inefficiencies when it comes to handling your management. Having strict processes in place for inventory management helps you keep your expenses down.
  • Take advantage of technology: Incorporating the latest technology can be a great way to keep your expenses down and your operations optimized.
  • Borrow money before you need it: In many cases, a business needs a quick cash infusion to tide itself over until more money comes in. This is why it’s always important to have access to a line of credit or a business loan.
  • Have a robust accounting system: Keeping detailed books can give you more insight into your cash flow and help you make more strategic decisions.

There are many elements that impact cash flow and business stability. Therefore, professionals who pursue an advanced degree, such as an MBA, can give them the foundational knowledge before starting or running a business. For example, the online MBA – General program offered by Youngstown State University (YSU) gives students a detailed background on cost-based decision-making and corporate financial management.

The Expenses of Decision-Making

YSU’s course called Cost Based Decision-Making teaches students the fundamentals of keeping a business’s financial statements in order. This includes breaking down the differences between direct and indirect product costs, fixed and variable costs and controllable and non-controllable costs. This course emphasizes both explaining the key concept as well as knowing when and where to use it.

Managing Corporate Finances

The Corporate Financial Management course focuses on teaching students the financial analysis techniques that are most commonly used when evaluating a business, project, budget or other financial decisions. In this course, students learn to analyze financial statements like the income statement, cash flow statement and balance sheet, as well as various financial ratios. This course works for business owners as well as students who aspire to reach upper management positions.

Students can complete Youngstown State University’s MBA – General online program in as few as 12 months and deepen their understanding of cash flow, economics, management and more.

Learn more about Youngstown State University’s online MBA – General program.

Related Articles

YSU Skyline Silhouette