In our new series on cash flow management, each month we’ll be exploring a different aspect of business financial health, the importance of a positive cash flow and how to both achieve and (more importantly) maintain it.
Today, for our first post in the series, we’ll be starting with the basics. Grab a notepad and pen and prepare to make some small changes in your business that could make a huge difference to your bottom line.
Part one: Cash flow basics
You might be confident in your cash flow management if you’ve been in business for a while, but if you’re new to business ownership or you could benefit from a quick recap of the fundamentals, keep reading.
What is cash flow?
Cash flow simply refers to your income and outgoings. The flow of money to and from your possession, or in the case of a business, the revenue you generate compared to the expenses you pay out.
If you’re familiar with the struggle to pay your employees’ wages at the end of the month, or paying every invoice at the last possible second, it’s likely you know about the difficulties of a negative cash flow. But even if your business has always made more money than it expends, you could still benefit from knowing why a positive cash flow is important and how to avoid falling foul of a lack of strict credit control procedures.
What is a positive cash flow?
To have a ‘positive’ cash flow, you need to bring in more money than you spend. It may sound simple, but it can be challenging to achieve and maintain a positive cash flow, especially if you have already fallen into debt.
A negative cash flow means your outgoings are higher than your income and you’re likely to feel like you’re always playing catch up, or robbing Peter to pay Paul, just to make ends meet. Breaking even might feel great, your outgoings are covered every month, but you’re left with no extra to reinvest and grow your business.
A positive cash flow, having money left over after all of your expenses, means you’re left with cash that you can choose to do whatever you want with.
Why is it important to maintain a positive cash flow?
Running a small business or being self-employed, while both incredible achievements, come with their own set of challenges. One of which is the lack of a regular, stable income.
Late payment is the principle cause of cash flow problems for many businesses, and when you run a small business or work for yourself you can’t afford to waste time chasing debtors. The time you spend chasing your invoices could be better spent converting new customers, creating additional revenue streams and pursuing other opportunities.
A negative cash flow can make life even more difficult when the unexpected happens. And if you can’t be sure when your clients will pay their bills, then you can’t know whether you’ll be able to pay your suppliers. It’s a vicious cycle, and one that can be difficult to break.
Keep your eye out for the next in our series on cash flow management, Failure to Plan is Planning to Fail, next month. Can’t wait to read more? Click here to get our guide, Happiness is a Positive Cash Flow.