Cash Flow: The Life Line Keeping Your Business Afloat
When operating a business, the amount of money you make and spend, or cash flow is one of the major indicators of its ability to thrive or likelihood to struggle. This comes as no surprise. We’ve all heard the saying that cash is king. That is especially true when running a company. Phillip Campbell, CPA, the former chief financial officer for multiple successful companies and a respected author was quoted as saying “Despite the fact that cash is the lifeblood of a business — the fuel that keeps the engine running — most business owners don’t truly have a handle on their cash flow.”
If you’re a business owner, and you’re not aware of the amount of cash flowing in and out of your business on a regular basis, you’re setting yourself up for failure. Below you will find vital cash flow related definitions, the benefits of knowing your cash flow, and 5 questions you can answer to ensure you know your business cash flow.
Cash Flow Related Vocabulary Defined
Profit
According to Investopedia.com, “Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity…”
Simply put, profit is the amount of money you make in your business minus the expenses. It is how much money that remains once all of your bills are paid.
Your goal is to have a hefty profit, that’s the only way you make money. Too often business owners confuse profit with our next term, cash flow.
Cash Flow
Also according to Investopedia.com, “Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business…”
Therefore, cash flow is not one number, it speaks to the overall flow of money in your business which paints a broader picture of your financial status.
A company can have a positive cash flow with no profit depending on the source of their funds.
For example, if a business takes out a business loan and sees an increase in cash flow that month, their actual profit might be zero because of their need to take out a loan.
A business can also be profitable and have no cash flow.
For example, if you contract with companies who delay their payment, you could have a cash flow of $40,000 with $10,000 that still hasn’t hit your bank account. If your monthly expenses are $45,000, that means you are profitable, but your cash flow is not positive.
Revenue
According to BusinessDictionary.com, revenue is “the income generated from the sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted.”
Revenue is also known as sales.
Why Knowing Your Cash Flow is Important
Knowing the monthly cash flow of your business is vital for many reasons. Here are 5 significant reasons why you should make knowing your cash flow a priority.
It Indicates Financial Health
Knowing your cash flow indicates the overall financial health of your business. It showcases your company’s ability to pay its bills and handle other financial responsibilities consistently.
Being unable to take care of your financial responsibilities, or having a lot of your revenue tied up in debt indicates that your financial health is failing.
It Indicates Your Ability to Generate Cash
Knowing how much money comes into your business every month and how much you have left at the end of the money after paying all expenses helps you to understand your ability to generate cash.
Keeping track of this consistently provides you with an overall cash flow projection which you can use to indicate your ability to cover expenses in the future.
It Highlights Your Debt
Because cash flow indicates where your money is going each month, the payments you make to your creditors are highlighted. By bringing constant attention to these debts which are taking hold of your incoming cash flow, you can focus on paying them off.
It Gives You Flexibility
When your business has a positive monthly cash flow, it gives you flexibility.
You can use your positive cash flow to invest more in your business and make choices that will lead to increased revenue.
When faced with a dilemma, you have the opportunity to make choices that will best fit your business because you have the cash available.
Questions to Answer About Your Cash Flow
When you’re working on improving the health of your business and thus your cash flow, you must know what to look for in the process. As you review your cash flow, here are a few questions you should be able to answer.
- What’s the difference between profit and cash flow?
- Where does my cash go?
- Do I have hidden cash flow (ex. debt)
- How much cash does my business have?
- How much cash does my business need to operate?
- Where does my business get and spend cash?
- How do my income and expected income affect the amount of cash I need to expand my business?
Cash is king in business and knowing your cash flow will help monitor your financial health to keep your business afloat. When you’re running a business, you get busy, but reminding yourself of why knowing your cash flow numbers is important can help you keep it at the top of your priority list.
As you work towards becoming a cash flow king (or queen), remember you should always be able to answer the cash flow related questions listed above. If you have the cash to keep your business afloat, you are more likely to stay in business as long as you keep the cash flowing. Keeping track of your cash flow is key to knowing your financial health and in indicating your future ability to remain in business.
Cash flow is just a part of running a successful business. Ensuring all of your employees are engaged in the practices of your company is a necessary skill as well. When you’re ready to make sure your employees are involved as you expand and grow, download my free book, 5 Tips to Improve Employee Engagement. Click here to get your copy today. C
About the Author Cindy Constable
Culture must be created, grown, and sustained by design over the long term. Cindy is a Culture Transformation Specialist for corporations. She uses a restorative process called A.I.R.R. to elevate your company culture and bring integration between your leadership, vision, culture, and team members to enhance overall performance.
