Table of Contents 

• The importance of cash flow
• Significance of understanding cash flow statements
• 10 reasons why cash flow is important for your business
• Tracking your cash flow
• FAQ

Cash flow is vital for the success and survival of a small business in Canada. Without it, businesses are unable to thrive.

More than two-thirds (67.6%) of all businesses expect to face cost-related obstacles over the next three months, according to a survey conducted by Statistics Canada in August 2024.

In this article, you'll learn why solopreneurs and business owners must understand the importance of cash flow for long-term sustainability.

The importance of cash flow

When you run your business, you need to ensure that you have as much cash flowing in as possible. Cash inflow is essential, as it helps pay for your expenses and operating costs. 

Cash inflow is created by making sales, receiving payments from customers and investors, and earning interest from investments or savings. 

Businesses should strive for positive cash flow to cover their costs and still have sufficient cash left over that can be reinvested in the business or saved in a reserve fund for contingencies.

With a lack of steady incoming money, companies are more likely to fail, as they may not be able to pay their ongoing expenses. That’s why cash plays such a significant role and should be regularly monitored to optimize cash flow. 

Significance of understanding cash flow statements 

Cash flow statements are some of the key financial documents that entrepreneurs should learn to read.

Essentially, they keep tabs on the inflows and outflows of cash, showing you how well you manage the money in your business.

Cash flow statements provide an overview of the following three activities:

• Operating activities
• Financing activities
• Investing activities

10 reasons why cash flow is important for your business

Cash is king when it comes to building a successful company.

Here are 10 reasons why cash flow is important for small to medium businesses.

1. Seeing how you allocate and spend your money 

Effective cash flow management helps pinpoint where money is spent, allowing for cost-cutting measures in certain areas.

Also, reviewing cash flow statements can provide an overview of payments not typically included in a profit and loss statement, such as loan repayments. This provides a clearer picture of how the money is being dispersed.

2. Measuring your cash flow performance 

By comparing forecasted cash flow with the actual results, businesses can assess the effectiveness of their financial plans. Cash flow statements can show how well they met their targets or identify gaps they can close. As a result, cash flow statements offer a way to improve the accuracy of future cash flow projections. 

3. Understanding your cash balance and working capital

Understanding whether a business has an excess or deficit of cash assists in making informed decisions about investing excess funds or seeking external financing from investors or lenders.

In addition, cash flow statements provide an analysis of working capital, which is the cash available for daily operations. Conducting this review can lead to improved cash management and business operations.

4. Boosting your cash flow 

By reviewing current data, businesses can discover ways to increase their cash flow. For instance, optimizing inventory management to collect receivables quicker could be a method to generate more cash. Looking at cash flow trends to identify areas of opportunity to grow cash inflows can be a game-changer that can help a business thrive.

5. Planning short-term goals 

Analyzing cash flow statements can help businesses plan for the near future. These statements provide a snapshot of the amount of cash that’s available at a specific time. Short-term goals could be for the next week, month, quarter, or year. This information is crucial for meeting immediate financial obligations and preventing insolvency. 

6. Making better decisions

Accurate cash flow statements allow business owners to make informed decisions and avoid financial pitfalls.

For example, you may notice fewer cash inflows in the last month due to customers not paying their invoices on time. These insights can help you determine whether to avoid unnecessary purchases until outstanding payments have been received.

Without careful cash flow management, poor choices could threaten the profitability of a business.

7. Preserving relationships

The last thing you want is to start having cash flow problems that could jeopardize your reputation.

For instance, if you're deficient in cash, it can hinder your ability to pay suppliers on time — which could damage your business relationships. Focusing on keeping your cash flow positive will help protect your relationships with vendors, customers, and investors.

8. Managing emergencies 

Cash flow statements enable businesses to prepare for financial distress by providing insight into potential cash shortages or surpluses. Anticipating when there could be cash shortfalls can help business managers and owners find solutions before the problem escalates. Taking a proactive approach can be pivotal for overcoming challenges and achieving business goals.

9. Making long-term plans

Beyond short-term needs, cash flow statements are also necessary for long-term financial planning. Reviewing the company’s finances can help businesses prioritize upcoming activities. Ultimately, these statements help identify important changes that can position a company to become successful over the long run.

10. Expanding your business

When the time is right, you may have the opportunity to expand business operations. You can do this by opening another retail location, creating a new product line, or adding a new service.

Whatever form it takes, growing your business could require significant up-front investment. Managing cash flow efficiently can help you expand when ready and mitigate the risk of any long-term financial obstacles.

Tracking your cash flow

When you manage your company, monitoring your cash flow is important. It helps ensure your daily operations run smoothly, without financial obstacles. Whether you use various cash flow tools or analyze your cash flow statements, you have valuable resources supporting day-to-day management and long-term strategic planning.

Want to give it a try? Your business can streamline cash flow projections and financial reports with the help of QuickBooks. Get started today with a free trial.