Google the term “Cash flow is the lifeblood of a business” and you will receive approximately 400,000 results back, so it’s a common term. Basically it means that without positive cash flow – more money flowing in than out - a business will not be able to survive for long. Increased sales and profits are what we all strive for, but without a positive cash flow those same sales and profits that look good on paper don’t pay the bills. That’s what cash does for you, it pays your employees, it pays your taxes and insurance and other business expenses, it pays for inventory, it pays for the assets that are required to expand and grow your business, and most importantly, it pays you.
But what does positive cash flow look like, and how do you achieve positive cash flow? Simply put, if you have more money in your bank account at the end of the month (or other business cycle) than you do at the beginning of the month you probably have positive cash flow. If you have less in your account you have negative cash flow. Of course, it can be much more complex than that, depending on your sales, payables and receivables. The key is to keep the cash flowing in faster than it is flowing out.
While you should strive for positive cash flow, short term negative cash flow is not a major concern, as long as you are making smart purchases for the business; necessary inventory to service your customers, new assets that will help you be more efficient, or even paying off high interest credit cards or lines of credit. Make sure that you are making purchases or taking steps that improve your business. Hopefully, at some time in the not-too-distant future your key purchases pay off and help you return to a positive cash flow. And of course, pay attention to your cash flow and know when to put the brakes on if need be.
One key point to keep in mind, profit on your income statement does not equate to positive cash flow. You can have a big sales volume but if a high percentage of your invoices are ran through your accounts receivable you run the risk of having a negative cash flow. Here’s why. During that same time that you are achieving high sales volume, you also have to pay your bills and your payroll and taxes, while you might not be collecting on your receivables as fast as you would like or need. More cash is flowing out of your account than into your account, and that leads to negative cash flow. And that can lead to lost supplier discounts, finance charges, lost business opportunities, missed payrolls and in extreme cases, closing the doors.
If you find yourself struggling with cash flow issues, give us a call, we’d love to help move your business forward and succeed!