Did you know that one of the biggest causes of business failure for small businesses is poor cash flow management? Do you find yourself worrying and fearful about managing the financial side of your business? Or maybe you just put it off? This blog is for you.
Hello and welcome to our new blog series – The Tao of Cash Flow: How to Master Your Business Finances.
In this series, we will explore the ins and outs of managing your cash flow effectively so you can easily keep track of your business finances, overcome your fears and avoid the dangers that lead to business bankruptcy. We will explore a range of topics and techniques including:
- What is cash flow and why it is important
- Overcoming your financial fears with a cash flow forecast
- How to easily keep track of who owes you money and who is late in paying
- How to maximise income and minimise expenses in your business
- How to extend credit to customers
- How to anticipate and deal with short term cash flow issues
- How to get customers to pay quicker, and how to handle those who pay late
- How to use accounting software to manage your cash flow
- How to streamline the elements of cash conversion
- And much more…
We hope that if you follow this blog series, then by the end you will truly be a master of managing your business finances.
So let’s get started by looking at what cash flow is and why it is important.
What is Cash Flow?
Cash flow is simply the movement of cash into and out of your business.
Money comes into your business through making sales, selling shares, or taking out bank loans and overdrafts. Then it leaves your business when you buy new stock, pay taxes, pay back loans or pay for your operating expenses such as rent, advertising e.t.c. You need to make sure you are balancing these.
It is important to note that Cash Flow is not the same as Profit and Loss. Profit and Loss refers to how much money you make after your expenses. It is your sales revenue minus your costs. But cash flow is the flow of the money.
When it comes to the health and success of your business, focusing on cash flow is much more important than a focus on profit. Why? Well, it is quite easy for a business to be very profitable and yet fail or go bankrupt! You can be making a lot of profit, but if that profit is not enough to cover a large unexpected bill that might arise, or it won’t come in until several weeks after a big bill is due, then your business will be in trouble. So making sure you have the money in the bank to pay your expenses when they are due, is vital to the effective management of your business.
For your task this week, there is a well known and very important quote that we’d like you to remember. In fact, we’d advise engraving it on your mind, posting it on your desktop background, printing it out and sticking it in a prominent place in your office or anything else you need to do to remember it…
“Turnover is Vanity, Profit is Sanity but Cash is King”
Why is managing cash flow effectively important?
There are a variety of reasons why managing cash flow is so important –
- Poor cash flow is one of the biggest causes of business failure.
- It is the primary indicator of business health.
- You need to be able to pay your bills on time.
- You can plan ahead and respond to new opportunities when they arise, without worry or putting your business at risk.
- It’s easier to spot potential gaps in your cash flow and prepare for them.
- You can reduce your dependence on banks and interest rates, thereby saving your business money.
As we finish this week’s blog post, we would like you to do several things
First, please memorise the quote above.
Second, please think about the answer to these questions in order to prepare for our post next week – How to do a Cash Flow Forecast.
- How much cash does my business have right now?
- How much cash does my business generate each month?
- How much does my business need in order to operate?
- When does the money come into my business?
- When is the money needed?
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