Cash flow. A term anyone involved in the world of business is familiar with. And for good reason, too, for rarely do we ever come across a metric that is both valuable and easy for most to understand.
Defined simply as the net amount of money being transferred into and out of a business, cash flow is a staple in any savvy business owner’s arsenal of performance metrics and key performance indicators (KPIs). We all know this. But why, then, do so many businesses continue to run into expensive, cash flow-related problems? And yes, that includes the profitable ones!
Not measured, not managed
In an age where sales growth and profitability targets are discussed in meeting rooms ad nauseum, it would seem the focus on cash flow is minimal at best at many small- and medium-sized enterprises (SMEs).
Whilst it is not necessarily wrong to focus on these areas of business performance, doing so at the expense of devoting resources to cash flow management can prove detrimental.
This often hits home for business owners when – despite having seen encouraging growth in financial metrics relating to sales or profitability – they find themselves struggling to come up with enough money to cover expenses like payroll, loan payments, and even taxes. Indeed, the expression “cash is king” didn’t become so popular for no reason.
Cash flow management 101
Whereas cash flow is the term used to describe changes to a business’ cash balance between any two points in time, cash flow management is the process by which a business monitors and analyses these changes.
Why is it important? To build upon what has already been put forward, committing time and effort to cash flow management enables for early trend detection whilst also proving a useful input with regards to mapping out the path forward for a business.
On the latter, understanding a business’ historical cash flow performance is vital in the context of both short- and long-term budgeting. Estimated cash reserves, for example, will prove far more reliable, bolstering the extent to which a budget can serve its purpose as a point of reference for a business owner throughout the financial year.
What’s more, in the ideal scenario whereby positive cash flow has been upward trending consistently, knowing the context behind – and extent of – such growth is pivotal toward any decisions related to business expansion. Can you take on addition staff? Enter into another vertical? Open another store? Businesses with a history of sound cash flow management often can often answer such questions from a more informed position.
Listen, no one has ever sought issue with a growing profit margin or rising sales figures. These are fundamental qualities of a growing, healthy for-profit business. Realise, however, that becoming hell-bent on achieving such outcomes – and thus, ignoring cash flow management altogether – often leads to expensive, regrettable problems later on.
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.” – Michael Dell (Founder & CEO, Dell Technologies)