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Why is cash flow important?

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FindLaw states that positive cash flow is a strong sign a business is in good financial health. Companies rely on cash to pay bills, protect against risks of negative business cycles and reduce reliance on debt for payments. Cash flow brings financial and operational stability to an organization, according to Neil Kokemuller for the Houston Chronicle.

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Full Answer

Companies often take on debt to purchase buildings, equipment, assets and inventory used to start and operate a business. A positive cash flow allows the company to meet its near-term debt obligations to avoid late payments and loan defaults. Kokemuller also points out that when a company generates cash to fund purchases, it minimizes its ongoing reliance on debt financing. Being debt-strapped is a restriction on future cash flow.

Positive cash flow also impacts a company's ability to grow. When a company only generates enough cash to meet its debt and expense obligations, it is difficult to invest in growth initiatives. Without the ability to generate new revenue sources and customers, a company can become stale. Cash flow also provides a safety net so company leaders can operate the business without constant fear of debt pressure and potential bankruptcy. Kokemuller notes that for public companies, cash reserves also appease and attract investors.

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