Why do businesses fail well whatever the reason it normally comes down to a lack
of cash. Employees don't get paid for the work they do suppliers don't get paid and
ultimately the business fails and in this video we're gonna look at why cash is so important.
The first reason cash is important is because it allows you to pay suppliers overheads and
your employees if you don't have cash in a business you aren't going available to pay those
key stakeholders paying suppliers is important because they supply the business with their goods
without these the business has nothing to sell having a great relationship with
suppliers means that you can negotiate credit terms you pay for the goods they supply you in 30
60 or 90 days of receiving the goods this is important for your own cash reserves and cash flow
because if you're receiving the goods and then paying for them in 30 60 or 90 days you have time
to sell those goods to your customers generate some cash flow and then pay your supplier if you
don't pay suppliers on time this can damage your relationship and basically mean that you don't
get favorable credit terms putting strain on cash in your business basically cash is important keep
the flow of goods from suppliers coming into your business the second lot of people you need to pay
are your employees obviously employees aren't going to work for free so having enough cash to
pay them on time every week or month is massively important to the business and its reputation if
you fail to pay employees basically they're going to stop working for you which is going
to impact your business the product you provide and also the service you're providing again cash
is important so you can pay these people on time what they deserve for working in your business
overheads also need to be paid these are things such as rent electricity and insurance if cash is
not available in your business to pay for these things then their services will be withdrawn so
your electricity provider will stop providing your premises with electricity the landlord
that owns the property that you're using may evict you and again if these things aren't in place it's
going to be very difficult for you to get your product to the end consumer without electricity
and all the things in place to help the business run smoothly we've already touched upon this quite
a bit but the key reason cash is important to a business is it prevents the business from failing
if you think about it most businesses that fail don't have enough cash and there's two key points
when cash can be really important to a business success that's during startup and during rapid
growth so when a business first starts up it's got to usually invest a lot of money into premises
equipment stock and so on if the business has not got enough cash to do these things then it's not
really even going to get off the ground it needs a substantial amount of cash readily available
to invest in the business and its startup you might even need some reserves to pay employees
to begin with before your product starts selling before your customers get used to your business
and become loyalty business so the startup phase is really where the business has a big risk of
failure the second one is when they're growing rapidly if the business is growing rapidly
and reinvesting and reinvesting into the business into new products new designs more employees
this is a time when the business also risks failure because it's reinvesting all of its
cash and if the business takes a turn or there's not enough cash to keep paying these new employees
then it can become financially unstable and potentially fail there's a few things you can do
to ensure you've got enough cash in your business so you can negotiate terms like we suggested
earlier so if you've got a 60-day term to pay your suppliers but you'll give your customers 30 days
you're getting cash in quicker than you're paying it out which is good for your cash flow
and keeping cash in your business another thing you can do is have some money aside
just in case things take a turn for the worse and you're struggling for a bit of cash
you could also instead of having cash to one side you could have an overdraft arrangement
with your bank or building society so if you do fall below zero you've got that buffer
in terms of an overdraft so you can pay your employees buy stock pay suppliers and so on
so we've talked a lot about cash but what's the difference between cash and profit well not all
cash is profit businesses have to pay their costs from the cash that comes in think about tesla when
the car sells and the business receives money from the customer that money is not all profit part of
that pays for the materials used on the car the employee's wages that worked on the car overheads
such as rent electricity for these big warehouses and manufacturing plants it's really important
to understand that not all cash is profit the business could have millions or billions coming
into the business in cash but still be making a loss once all these costs have been deducted
then what's left is profit all in all cash is vital to the survival of a business most
businesses are operating to make a profit if a business fails to have enough cash in the business
then ultimately they won't be able to continue operating if you want to know more about cash flow
and cash flow forecasts then watch this video here thanks for watching the video to the end don't
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