Why is positive cash flow important to a business?
I set up in business just over two years ago because I am passionate about helping people get paid on time without asking for money. What I hadn’t realised is how few businesses related cash flow to credit control or cash collection.
Having just moved house, I’m sure you all know the expense both monetary and time wise that comes with that, I am having to be really careful with my cash flow. Why?
Well this is my office currently:
It isn’t ideal, I can’t get my legs under the “desk”, I haven’t got any storage and I have no where to stick anything up. These will come in time, when I can a – afford them and b – find the right solution for the room. It’s such a beautiful room I don’t want to ruin it by buying the first and cheapest desk/storage unit I see.
What is cash flow?
According to www.businessdictionary.com/ cash flow is: “In accounting, cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It is called positive if the closing balance is higher than the opening balance, otherwise called negative.”
So I need to not only get work in to start my cash flow, I also need to get the invoices paid. Without invoices being paid then you don’t have positive cash flow.
What’s the importance of positive cash flow?
Unless you are buying very big fixed assets which are a long term investment for your company, which create negative cash flow but for a positive reason, then anyone looking to invest in your company, will be more hesitant to get involved if you have negative cash flow.
Positive cash flow means you are in control of your cash. Profit is important but cash is king. If you have positive cash flow, your company can pay it’s bills, pay you and your employees a wage, pay your suppliers on time and hopefully, turn a profit too.
Is it hard to calculate the cash flow in my business?
I could write out here how easy it is to calculate your cash flow and the best process to follow to calculate it, but a quick Google gives so many ways written by experts in this field so I I’ll just post the links.
The first one is from The BBC’s Bitesize GCSE Business Studies. It is the simplest way to calculate headline cash flow, by looking at your bank statement. The BBC’s article can be found here.
The second is a more complicated way, but expertly explained by http://www.wikihow.com/ in 15 simple steps. This method works better if you have more than 1 bank account. The WikiHow article can be found here.
For both these methods, don’t forget you also need to think about things you put on your personal credit card or you pay for in cash that you haven’t taken out of your company bank account.
Although these entries won’t be seen by people who run credit checks on your company, you should include in them when you do your personal cash flow analysis as this will give you a true idea of the cash flow within your company.
- Positive cash flow makes you more appealing to suppliers
- Positive cash flow makes you more appealing to investors
- There are many different ways of calculating cash flow, from the simple to the complex
- Negative cash flow isn’t always bad, providing there is a legitimate investment for future growth and it is a temporary negative cash flow
- Profit is crucial, but cash is king.