{"id":6258,"date":"2020-08-19T13:36:46","date_gmt":"2020-08-19T13:36:46","guid":{"rendered":"https:\/\/kredx.com\/blog\/?p=6258"},"modified":"2023-10-26T05:59:37","modified_gmt":"2023-10-26T05:59:37","slug":"why-is-cash-flow-a-leading-cause-of-small-business-failure","status":"publish","type":"post","link":"https:\/\/www.kredx.com\/blog\/why-is-cash-flow-a-leading-cause-of-small-business-failure\/","title":{"rendered":"Why Is Cash Flow A Leading Cause Of Small Business Failure?"},"content":{"rendered":"

Small businesses are an integral part of any growing and flourishing economy. In India, there are about <\/span>42.5 million small business enterprises<\/span><\/a>, including both registered and unregistered ones. However, a significant fraction of those enterprises does not even survive the first year of setting into operations. Analysts attribute a lack of cash flow management as one of the leading causes behind that.\u00a0<\/span><\/p>\n

What Is Cash Flow And Why Is It Important?<\/b><\/h2>\n

Cash flow <\/b>refers to the net inflow and outflow of cash and cash equivalents in and out of your enterprise. The ability to balance this factor determines an organisation\u2019s survival. It is primarily because a business will not be able to maintain its operations efficiently without sufficient cash.\u00a0<\/span><\/p>\n

Now, while several small business owners regard profitability and positive cash flow as the same thing, however, they are not. Ensuring proper <\/span>cash flow management rather than focussing on profit is often more significant for small-scale enterprises. The following example explains it further.<\/span><\/p>\n

Suppose, ABC Pvt. Ltd. sold goods worth Rs. 2 lakh in August. It also recorded expenses like employees\u2019 salary, payments to suppliers, and other petty expenses, amounting to Rs. 1.5 lakh. Of the total sale, however, Rs. 1 lakh is on credit, which they are not due to receive until the end of September.<\/span><\/p>\n

Thus, the financial statements represented profitability at Rs. 50,000 for the month of August. However, in terms of net cash flow, they only received Rs. 1 lakh against an outflow of Rs. 1.5 lakh. For an enterprise in its initial stage, a negative cash flow of Rs. 50,000 is a significant setback, capable of hindering operations.\u00a0<\/span><\/p>\n

Thus, maintaining positive cash flow is prudent, and often an indication of a business\u2019s success. Sufficient cash flow allows an organisation to upscale its operations more efficiently, forming the roadway to further growth.\u00a0<\/span><\/p>\n

How To Improve Cash Flow Management?<\/b><\/h2>\n

Your business\u2019s survival and growth hinge on proper management of cash flow; and, there are several ways in which that can be achieved. Take a look.<\/span><\/p>\n