You’ve heard it all: cash flow is king, cash flow is the lifeblood of your business, cash flow is mission-critical. Yes, cash flow is all those things, but do you know why or how? Let’s take a step back because a basic understanding of cash flow and how it can make or break your business may just be your saving grace.
The truth is that if you can understand and master cash flow management, you’ll dramatically increase your business’s chance of survival. Poor cash flow management is the second biggest cause of startup failure, so if you can overcome this bad boy, you’ll have one less obstacle in your way.
First, let’s start with the basics. What is cash flow? Cash flow measures the movement of money in and out of your business during a specific window of time. Positive cash flow means you have more money coming into the business than going out. Negative cash flow (as you could guess) means you have more money leaving the business than coming in. And, yes, thanks to financial lending, it is possible to spend more than you have.
Cash flow and revenue are not the same things. Revenue measures how much money your business is making, while cash flow measures both how much you’re making and how much you’re spending. Cash flow also takes into account the liquidity of your cash. Let’s explain this with an example.
Kyle is an employee at the local grocery store, and today is payday. Kyle has worked hard all month, and he’s delighted to receive a hefty $250 check at the end of a long shift. Ecstatic, Kyle decides it’s time to treat yo’ self and makes a detour to GameStop on the way home. Money’s been short recently, but he’s excited to be able to afford some entertainment for himself finally.
He makes his way to the back of the store and picks out a few new games he’s had his eye on, the price totaling $150. No problem, right? His $250 check should have no problem covering this expense. Well, not quite.
See, it’s the end of the day, and the bank has already closed, so Kyle will have to wait until tomorrow to cash the check. Technically, he doesn’t have cash in his wallet right now, so he can’t spend it. This scenario shows a cash flow issue—Kyle’s made revenue, but he doesn’t have cash yet. No games for Kyle. Poor Kyle.
This example illustrates a similar problem that kills so many small businesses. Revenue does not equal cash on hand.
Things eventually worked out for Kyle, and they’ll work out for your business, too. Well, if you can master cash flow, that is. Here is how cash flow can make your business:
Unfortunately, the time for you to pay the bills and the time for your clients to pay you doesn’t always line up. By tracking your cash flow with bookkeeping software like Sunrise, you can make sure you have money (or will have money) on hand to pay what you owe. By making timely payments, you’ll improve your credit score and conjointly your position to score top-notch financing in the future.
Luckily, Kyle was able to wait until the next day to cash his check and buy his games—no harm done. For your small business, however, you can’t always afford to wait another day, week, or month.
By maintaining positive cash flow, you’ll have capital on hand to provide whatever your business needs. Whether you need to fix a damaged vehicle, patch a hole in your restaurant’s roof, or hire extra help for the busy weekend, you’ll have the capital you need when you need it.
Owning a business isn’t all about putting out fires and getting by—it’s about building, thriving, and expanding. Positive cash flow management will help you set aside capital to invest in your business’s future.
By staying on top of your cash flow, you’ll know if you can afford a commercial mortgage to expand to a second location. Or you’ll know if you can hire additional employees to support the business’s demands. These choices won’t be guesswork—they’ll be calculated decisions.
Fail to manage your cash flow, and you’ve practically guaranteed your business’s defeat. Here’s how cash flow (or lack thereof) can break your business:
The world runs on money. Money keeps your business alive, and it’s also what can kill it. If you can’t afford to pay your employees, they won’t work. If you don’t have money to pay your suppliers, they won’t provide you with materials. If you fail to make a payment on your loan, they could repossess your assets. No money, no business. It doesn’t matter if you have the best idea, product, strategy, team, and market-fit in the world if you don’t have the cash flow to continue supporting it.
When you don’t have money in the bank to pay for what you need, debt financing can save or destroy your business. Maybe you need to replace a piece of equipment immediately, but your clients still have a couple of weeks to make their payments. So perhaps you snag a short term loan to pay for the new equipment.
Months later, you’re low on cash at the end of the month, and you have to pull from your line of credit to make your loan payment. Now, the end of the next month comes, and you need additional cash to make your loan payment and to pay off your line of credit. Now what? Your business is in big trouble. Negative cash flow can force you into dangerous debt cycles that send your business’s finances spiraling out of control.
In all reality, cash flow isn’t king—you are. By taking the reins of your cash flow, you can steer your business in the right direction. Don’t let negative cash flow become an agitant that strikes your business at random. Track the ins and outs of your money, plan ahead, and let cash flow make your business—not break it.