Cash flow is one of the most important things for a small or medium sized business to grow and be sustainable within the dynamic business environment today. As it is often said, “cash is king” and cash is the life blood of any business. Without cash, you are not able to meet your financial obligations both in the short-term and in the long run and this will definitely lead to an early death for your business.
According to a research report published by the U.S. Bureau of Labor Statistics’ Monthly Labor Review, only two thirds of new businesses survive past their second year, 44% survive four years while only 31% survive beyond five years. Scholars in entrepreneurship did a study and found out that one of the leading causes of death for the small and medium business is insufficient capital coupled with misallocation of available funds to purchasing of non-priority assets. The need of having free cash flow in your business and allocating the cash to the right business functions depending on the growth stage of your business therefore cannot be overemphasized.
Having free cash flow is important, but the most critical thing is to know how to manage the cash so that it reaps the highest benefits to your business. First you need to have clear strategies on how you are going to achieve a consistent positive cash flow position in your business. Then you need to come up with a clear plan on how you are going to utilize your free cash flows so that you are able to get some returns from it instead of it just lying idle in your current bank account; and probably incurring monthly ledger fees. On the importance of investing the free cash flows from your business, an analyst from Stern Options explains that, “investing your free cash flows in low risk investment vehicles such as fixed deposit accounts, and government bills or bonds will earn you returns that will help you counter the depreciating factor on the value of your idle cash that is caused by rising inflation.”
Cash flows explained
As explained above, free cash flow indicates how healthy your business is and is also used as a measure of the financial performance of your business. To arrive at the figure for your free cash flow in your business, you subtract the total amount of money you spend maintaining and acquiring new assets from the amount you have as your net operating cash flow. On the other hand, your operating cash flow is the cash generated from your normal business operations; and it helps to determine whether your business is able to generate enough cash to run your day to day business operations. 
When your operating cash flow falls into the negative, most of the times you will be required to inject more capital into the business from external sources such as through a loan; or get additional equity investment into your business from yourself or by inviting new shareholders into the business.
Maintaining a positive cash flow position in your business
Getting to a point whereby your business is cash flow positive with sufficient amount of free cash flows to invest in expansion or absorb any market shocks is the dream of every business person. However, to arrive to such a safe position in your business, you will need to have made deliberate decisions to ensure that you receive money into your business much faster than you pay out. Different business owners opt to implement varying cash flow management strategies in order to achieve this same goal.
The most common strategy used is that of ensuring that your customers pay much faster than you pay your suppliers. Credit sales are a good thing for your business since they enable you to get more customers as 
compared to when you sell all your products on a cash basis. However, ensuring that your debtors pay you
within a shorter period of time compared to the length of time it takes to pay your creditors helps you in generating more cash flow in your business hence boosting your liquidity. To motivate your debtors to pay much faster, you can introduce trade discounts for those paying up before their credit period expires.
In the event that your debtors are taking longer to pay their dues, you can use the option of invoice discounting in order to get the cash in hand much faster and keep running other business operations. Other strategies used include having your customers prepaying for their orders which are to be delivered much later. This gives you the funds you need to acquire raw materials and do your production before you deliver the goods to the buyers, hence ensuring your business is not cash strained at any given point.
Irrespective of the strategy you choose to implement in order to get to a constant cash flow positive position in your business, always have a plan in place on how you are going to utilize the free cash flow to generate more income. These could be through investing in fixed interest securities such as short-term government bills or fixed deposit accounts where your repayment is guaranteed when your business needs the cash within a short notice.
