Category: Brand · 3 min read
Demystifying Cash Flow
on October 8, 2019
on October 8, 2019
Running a business is hard. Some owners focus on their bank account balance, and others focus on their profit and loss statements. But understanding the cash moving in and out of your business is every bit as important. Every month, you have certain expenses to pay to stay in business. Your rent, loan payments, taxes, or other vendor payments. Just like water, cash flows in more ways than one, even though it may seem like it only flows out.
Cash flow, in fact, is one of the key signs to determine how your business is doing. Let’s break it all down to explain what cash flow is and why it’s important to examine month to month.
What is Cash Flow?
Cash flow is money that is coming into your business in the form of client commissions, retainer fees, or billable hours and going out as monthly payments for rent, payroll expenses, or one-time purchases. Cash flow takes into account more than just your overall profits and losses, and is more about understanding the inherent timing of cash coming in and out.
Why is it Important?
It’s no secret that money keeps businesses afloat. The same is true with a healthy cash flow. If you have more money coming in than out, then you’re in a good spot. But it’s also possible for your business to make a profit, but not have any cash flowing. Sometimes you can have revenue you have billed and recognized as revenue on your profit and loss statement, but have not actually received yet. That’s why cash flow is so important. It can make or break your business and put you in debt if you’re not careful.
Timing is important. If you pay all of your bills on the first of the month, but don’t receive your invoice payments until the middle of the month, you’re going to be in trouble, and it might be difficult to consistently make your payments. So, make sure you sync up your bills and invoices, so they are due at the same time.
Cash flow takes into account more than just your overall profits and losses, and is more about understanding the inherent timing of cash coming in and out.
Run a Cash Flow Analysis
To see how much cash you have moving right now, run a cash flow analysis. One way to do this is to compare your total unpaid purchases to the total sales due at the end of the month. If your total unpaid purchases are more than the total sales due, then you have a cash flow issue and you’ll have to spend more cash than you get the next month. It’s a good idea to do this on a regular basis, every month or every other month, to make sure you’re staying on the right track.
Watch Your Flow
The main person that knows how your business is doing is you. You have the power to help fix your cash flow and keep more coming in than going out. If you find your cash flow dwindling, see if you can find ways to either adjust your invoices and bill timing, cut back on some of your expenses, or consider opening a credit line if it gets extreme. If your cash flow is positive, give yourself a pat on the back and ensure you keep it that way. Keep the same invoice and bill timing, avoid big purchases if you can, and regularly monitor your cash flow.
You have the power to help fix your cash flow and keep more coming in than going out.
In other words, be aware of your cash flow. Stay on top of it, and don’t let it get further and further behind. Sometimes business is good, and sometimes it’s not. But, by looking at your cash flow, you can get a clear picture of your business’s financial health.
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