Photo Illustration: A faucet that has been relaesed and cash is flowing from it.

Every business needs cash. Regardless of how much revenue your business earns, if your cash is tied up in unpaid account receivables or unsold inventory, that money doesn’t do you any good. Maintaining a healthy business cash flow gives you the capacity to meet your financial obligations and the flexibility to grow with new opportunities.

Cash flow is one of the most common roadblocks to success—so much so that we’re presenting on the topic at several conferences this year. So let’s get back to basics, shall we?

What is Cash Flow?

Cash flow is a measurement of the amount of cash that comes into and out of your business in a particular period of time. When you have positive cash flow, you have more cash coming into your business than you have leaving it.

When you have negative cash flow, you have more money going out than coming in. In layman’s terms, managing cash flow is all about figuring out when you’re going to have cash in your hands, figuring out how to get more of it in your hands faster, and how to manage your spending.


Flow Figures

56%

The percentage of small business owners that are facing cash flow pressure.

Source: Xero

2 weeks

Businesses with more than $10,000 in monthly expenses had only 2 weeks of cash on hand.

Source: PNAS

82%

The number of failed businesses that said cash flow problems were a factor in their failure.

Source: US Bank

Over Half

The proportion of all businesses worried about how they’re going to pay their bills.

Source: Xero


Managing Cash Flow

Revenue measures how much money is coming into your business, while cash flow measures both how much comes in and how much is going out. Cash flow also takes into account things like financing activities; for example, did the bank just deposit a $10,000 loan into your account? It’s cash, so it counts! It’s how you manage those funds that will make or break your business.

If you’re looking to improve your cash flow management, we often suggest starting with these seven simple steps:

1. Stay on top of bookkeeping. It’s the single best way to understand all the financial transactions in your business, and you can’t do the rest of the steps without it.

2. Generate cash flow statements. If you have an accountant, they can do this for you. Otherwise, you can use software—or calculate it yourself using spreadsheets. You can up your analysis with cash flow projections to see how your decisions are impacting your future financial health.

3. Analyze your cash flow. Take the info from your cash flow statements and use it to understand how money is moving through your business.

4. Figure out whether you need to increase cash flow. Relying on your credit card or line of credit to make ends meet? These are signs you need to free up more cash flow.

5. Cut spending where you need to. Overspending can result from either covering unnecessary expenses or paying for expenses at inopportune times. Cut overspending to increase cash flow.

6. Speed up your accounts receivable. Whether you’re waiting on invoice payments from clients or deposits from payment processors, the faster you get money in your pocket, the more cash flow you’ll have.

7. Rinse and repeat. Make analyzing your statements a regular part of your back office routine. The more you do it, the better you’ll get at spotting opportunities to increase cash flow—and nip shortages in the bud.

By “paying yourself” first, it ensures that your financial results are based on having enough cash on hand before you pay any expenses.

The Relationship Between Cash Flow and Profit

Here’s the truth: Making profit generates cash flow. However, entrepreneurs commonly confuse cash flow with profitability. The two are not the same, but the best way we’ve found to illustrate that is by implementing Profit First into your business.

Mike Michalowicz’s “Profit First” model changes the Revenue – Expenses = Profit expression of traditional GAAP accounting into Sales – Profit = Expenses. While this is not an official figure to report on any of your financial statements, it’s an excellent cash flow management mindset that helps business owners prioritize their personal and business savings so that operating expenses, expansion, taxes, and personal income are always being paid.

By “paying yourself” first, it ensures that your financial results are based on having enough cash on hand before you pay any expenses. Thereby simplifying cash flow inside and outside your business.

Go Figure Accounting