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Where Did the Money Go?

Photo by Alexander Grey

The Importance of Understanding Cash Flow

Regardless of how innovative or useful a company’s product or service is, how effective the team is, or how commendable the mission, without cash, there simply is no business. Far too many business owners look only at revenue. If sales are up, they automatically assume the company must be in great shape. Then, they look in shock and disbelief at their overdrawn checking account, wondering what happened. They question how the business could have no money, when it seemingly is doing so well. And the answer is—they don’t understand cash flow.

What is Cash Flow?

While understanding revenue, expenses, and profit is crucial for any business owner, cash flow is an equally important metric in truly understanding a business’s financial health. Cash flow, representing the movement of money both in to and out of a business bank account, can be positive or negative, and will fluctuate as the business shifts and expands. A positive cash flow is just as it sounds—more money is coming into the account than leaving it. A negative cash flow, in contrast, means the exact opposite—more money is leaving the account than coming in.

Many would assume that having a positive cash flow means the business is profitable, while having a negative one means it’s not, but that’s not always the case. For example, you could have a positive cash flow because invoices aren’t being paid on time or there is some other error in accounts payable. Similarly, a business with a negative cash flow can still be profitable if it’s during a growth and expansion phase, where money is currently being spent on new investment opportunities that will have a large return on investment (ROI) in the future. One effective (and necessary) way to see how this all works and what it means for your business is with a cash flow statement.

What is a Cash Flow Statement?

A cash flow statement is a document that details a business’s cash transactions during specified periods of time. It will identify the parts of the business that generate the most revenue and those that generate the least, an important factor in the decision as to where to prioritize resources. It will also show the business’s expenses and when they’re getting paid. To run a profitable business, it’s crucial to be able to see these figures and the timing in between money coming in and money going out.

This statement should be as much of a key document to a business as a balance sheet and profit and loss statement. It contains valuable information that should be shared with leaders and key stakeholders making decisions about revenue-generating activities and expenditures. And it will also clearly show when the company will run out of cash.

How to Help Increase Your Cash Flow

  1. Ensure your business has an accurate cash flow statement that is being reviewed regularly.
  2. Pay close attention to your month-to-month surplus and shortfalls, so you can make more data-informed decision regarding expenditures and investments.
  3. Send invoices timely and consistently after delivery of products or services.
  4. Borrow money before you need to. It’s better to ask for loans from investors when you have the ability to provide them with a positive cash flow statement. This also ensures that you will have the needed money should your business experience an unexpected revenue shortfall.
  5. Reevaluate products and/or services. If it is not generating enough revenue, it may be time to alter your strategy and focus on others that could be more profitable.

Don’t be caught off guard by the balance in your checking account. As you conduct the day-to-day operations, ensure you are paying enough attention to your cash flow. Not taking the time to do so will prevent you from making the best business decisions possible.

At Agile Planners, we take care of the numbers, so you can sleep at night. We provide strategic guidance and outsourced CFO services to companies of all sizes. We can help provide the strategy your organization needs for the growth you want. We understand that no two organizations are the same. And with our experience and financial knowledge, we can help develop the right strategic plan for your business to grow and reach its goals. Simply, we’ll be your trusted partner, so you can focus on running your organization. Contact us today to learn more about how we can help.

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