Do You Know Where Your Money Comes From And Goes To ?
Cash flow is the life blood of any business.
Whatever the size of your business, from micro business to large conglomerates, it is only the flow of money into and out of your business that keeps your business alive. Let that blood dribble through your fingers for too long, and that business will suffer and eventually die. Just look at the demise of Debenhams, Arcadia Group, Mothercare to name just a few.
I find it staggering when I come across businesses that don’t have any kind of handle on their cashflow, let alone have a cash flow forecast, even in its simplest form. Many small businesses suffer with the continual roller coaster of feast and famine because of that, which causes paralysis when a business owner starts to think of expansion.
We are all in business to make profits, that’s a given. However, showing a profit in your Income and Expenditure statement is one thing, having a buoyant cashflow is something altogether different. Too many businesses who have shown profits and full order books have imploded because they have run out of cash.
What exactly Is Cash Flow?
It is simply the total amount of money flowing through your business. More money coming in than flowing out means you have a positive cashflow. When the opposite happens, you have negative cashflow. Obvious and simple.
However, it’s not the same thing as profit or revenue. Cash flow encompasses all money that is coming into and going out of your business, from every source. That could be from your revenue, but is could also be from other sources, such as money you may have introduced in the form of a loan, a bank loan or a sale of an investment. Cash flow tracks them all.
Putting borrowed money into your business brings you cash flow but that doesn’t mean your business is profitable. This is often the case with many startups, who survive on borrowed money initially before the business activities start generating cash. Borrowed money, despite enabling the company to start or to expand, can be very dangerous, something we’ll come onto in a minute.
Why Does Cash Flow Matter?
Cash flow matters because it enables the business to keep operating, meeting the cost of the expenses and overheads while you may be waiting to get paid from some of your suppliers. Without that flow, you can’t cover your expenses and your business will, at best, slow down or at worst, crash against that proverbial brick wall.
Understanding cash flow enables you to make better decisions in your business. You’ll know when the best time is to buy new kit, invest more in marketing, software for business efficiency or perhaps give your staff bonuses.
It allows you to plan in confidence and make those purchases when it’s right for the business and not just when you have the cash in your bank account. You will know the best time to implement that expansion plan you’ve been patiently waiting to start.
3 Types of Cash Flow (and be wary of the two jokers).
There are 3 types of cash that can flow into your business and two of them have both good and bad sides to them:
1. Cash Flow from Operating Activities. (The Ace in the pack).
Your operating cash flow is the money that flows into and out of your business due to your normal business operations. Money in from clients and money out on your costs and overheads incurred every day in your business. Operating Cash is the true oxygen bearing blood of your business, maintaining a healthy organisation.
2. Cash Flow from Financing Activities. (The 1st Joker).
This is money that is injected into the business, normally via a bank loan, sometimes a director’s loan and unfortunately, too often a sole trader who is continually putting their own money in to shore up their business.
There are times when the business genuinely needs this inflow of cash, to help with expansion or for a marketing drive but there are also times that, due to a lack of cash planning, money id borrowed for the wrong reasons, such as paying tax or VAT bills.
Always remember that this money needs to be repaid with interest. By taking this cash, you have created a priority creditor who can call in your loan at any time, despite what you believe your credit agreement might be telling you.
Businesses, both gargantuan and tiny have fallen foul of overborrowing because they have mistakenly thought of this borrowed money as a cash buffer. You are effectively relying on credit to run your business.
The https://www.thegazette.co.uk/insolvency is littered with companies have fallen foul of borrowed money and makes for grim reading. They have missed the importance of cash planning.
3. Cash Flow from Investing Activities. (The 2nd Joker).
The good part to this is cash that’s being generated from assets you hold, a very healthy state to be in. This could be from rents of building or machinery, royalties from books or other intellectual property, affiliate marketing, anything that is coming from something that is continually generating an income.
The bad part is selling those assets for the wrong reasons. They may be being sold to fund a new investment or simply because they are of no further use to you. The money raised could open the door to growth.
The issue arises when they are being sold because there is shortfall of operating cash. Selling a cash generating asset is never a good move and is a possible sign that all is not well in the business.
To Conclude
Many people will tell you that cash is King but as I hope you can see how that view is flawed. It is the cash your business generates that is the Ace and always be wary of using the Jokers to create more cash. If not managed well, they could be your downfall.
If you would like more help with planning the cash flow in your business hit the button below to get in touch.
Mark/January 2023