This is the first in a three part series about cash-flow and how to make it work for your small business.
As a kid, my parents’ words of encouragement in regards to saving were “take care of the pennies and the pounds (or dollars!) will take care of themselves”. That advice pretty much sums up the core of managing your personal finances; if you’re watching where your money is going you’ll be able to achieve your financial goals.
The equivalent advice in the business world is: manage your cash-flow and everything else will be ok! We all intuitively know cash-flow is important but the problem is there isn’t a whole lot of guidance on what cash-flow is and how to manage it! This series of posts is an attempt to solve that problem.
If someone asked you what the cash-flow of your business is, how would you answer? “em…it’s good?”. Cash-flow isn’t a thing, its a process. It’s watching the pennies move into and out of your business, over time. Personal Financial Tools like Wesabe.com and Mint.com did a great job of helping individuals manage their cash-flow by collecting all transactions from their bank accounts and then categorizing how they spent their money. As individuals, cash-flow is relatively consistent from month to month, so looking into spending history provides useful information on what will happen with future cash-flow (which is the only thing we can influence!).
In a business environment, the analogy to Mint is the accounting system. It literally accounts for the money your business spent and describes your historic cash-flow, e.g. you lost money last month by spending too much on office supplies. Unlike individuals, using historic data to forecast future cash-flow doesn’t work for most businesses. Income and expenses fluctuate so looking into the past doesnt provide much insight into what the current or future cash-flow will look like.
Lets try a quick cash-flow definition to help us out:” the movement of cash in and out of the business over a specific period of time, in the future“.
Right about now you might be thinking “I just read this whole blog post and I still don’t know why I should care about my business cash-flow”. Well, have no fear, the answer is here (or at least a simple example to explain)!
The dashboard view below from billFLO shows a 90-day forward looking view of a company’s cash-flow (automatically collected by billFLO from the business’s various systems and business processes). In the top right we can see the business is profitable and will end the period with $1641 in cash. All good, right? Not so quick! Look at the blue line (cash balance) over the 90 days. It goes negative in two places (January and early March). In other words, the company will go bust twice in the next 90 days because they run out of cash. Thats why managing cash-flow is important. This company knows about the cash-crunch and can respond ahead of time.
The message here is, whether you manage your cash-flow automatically in billFLO or on the back of a napkin, you should be managing it daily and building a picture of future cash-flow to avoid those nasty surprises and achieve your financial goals.
Next time: How to measure and manage cash-flow!
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