The cash within your business is often referred to as the lifeblood – that which enables your business to not only survive, but also prosper.

Just as your body will survive for a time without food or water, but without blood it will die, the same applies to your business. It can survive for a short time without sales or profits, but if it doesn’t have cash it will die.

As a business owner you have a rough idea in your head at all times about how much cash you have. You can check your bank balance – even on your phone – and either breathe a sigh of relief or groan internally at the numbers reflected there. Cash is your indicator that the business is healthy.

Or is it?

As we have all experienced at one time or another, cash may be high in the bank but low in reality. You may have had a customer pay you several invoices at once, but much of that has to go out again to various suppliers, or to purchase inventory. Or perhaps your profits look great on paper, but you don’t have the money to buy what you would like.

This is why the inflow and outflow of cash needs careful monitoring and management if your business is to stay healthy – and of course you want to see that cash flowing IN more than it flows OUT.

Cash flow is all about timing

Although cash measures your ability to pay your bills on a regular basis, it depends on the timing and amounts of cash flowing into and out of the business each week, month, or whatever period – this inflow/outflow process is your cash flow.

Cash Is NOT Profit

As we’ve discussed already, it’s important not to confuse cash with profit. Profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or other trading period. So even though your profits are (or will be) very good, you may still face those times when you are strapped for cash.

So it’s important to build up cash reserves by ensuring that the timing of cash movements is done in a way that your business is seeing the cash flow IN more than it flows OUT – and doing this at the right time.

Cash Inflows And Cash Outflows

The first step in solving your cash flow problem is realizing that you have one! Here are a few things you should be doing regularly:

  • Pay attention to the warning signs. Are certain customers taking longer to pay? Are you always struggling for cash?
  • Understand your immediate financial position. Read more about effective financial management here.
  • Check the extent of your reliance on your bank. It’s good to have them as a safety net, but they should not be constantly saving you from cash flow disasters.

Cash flow forecasting

When done properly, true cash flow forecasting enables you to plan for:

  • The amount of cash your business needs to keep trading
  • Break-even cash flows
  • The times during the year when cash tends to flow in more than it flows out
  • The times during the year when cash tends to flow out more than it flows in!
  • When to apply for financing or a loan
  • Excess funds (not getting over-excited or over-spending)
  • The drivers of your business and cash flow

Your cash flow “drivers” are those areas that affect all of those items we have just mentioned. Some of those drivers include:

  • Receivables
  • Suppliers
  • Inventory
  • Assets
  • Trading patterns
  • Trading volume

If you work on your drivers you have to be monitoring them – ideally on a daily basis.

Sadly, more businesses fail because of poor cash flow than because of poor profit. As we’ve seen, poor cash flow can make you unable to meet upcoming financial obligations, and soon operations cease.

No matter how excellent your systems are, or how appreciative your clients and customers, if your business runs out of cash, it will cease to exist.

Please talk to us – or to your advisor – about reviewing your cash flow drivers. And see that cash come IN far more than it goes OUT – or at least at the right times!