Back April 29, 2016

Why Cash Flow

”The lifeblood of the business”. This is the common referral to cash flow. Though it sounds odd, in fact, it’s not overstated. The existence of your company depends on the health of your cash flow. Not profit, nor cash, but cash flow.

What does cash flow involve?

Starting a business or even running a mature one cannot be done successfully without paying attention to its cash flow. This means tracking costs, fixed and variable, income and project sales. Most important, not leaving them to hazard.

One thing the cash flow does well is showing how much the business can afford to grow. Investments need cash, which you may have at a certain point. But unless the business generates future income to cover expenses, it may come to a point where you cannot pay salaries, for instance. That would bring the business to a crisis and annul the growth.

The cash flow also shows how sustainable the business is. Comparing expenses to income (actual and projected), it becomes clear if you’re on the right track. If not, the cash flow dynamic also offers a good view of when and how you need to intervene (cut expenses, bring in more income).

Types of cash flow

First of all, when you say cash flow, don’t think of cash only. Cash is what you have at a certain moment, a situation due to change. It is far from reliable to make middle or long-term decisions. It is the movement (flow) of that cash to actually support the business activity.

Cash flow may be positive or negative. As you expected, a positive cash flow is what you need to aim for. It means income inflow is greater than the expenses outflow. This not only supports the business activity, but it also assists growth. A negative cash flow, on the other hand, means your business may be in trouble. Either you don’t collect money fast enough to cover expenses, or you spend more than you earn. Either way, it is a sign you need to take action.

Depending on the cash sources and destinations, we talk about Operating, Investing and Financing Cash Flow. Let’s have a look to understand where your cash comes from and goes to.

Operating cash flow, as the name suggests, is the cash used to support the current activity of your business. You pay operational costs and cash in from sales. This is the easiest to control.

Investing cash flow is the movement of cash not related directly to your activity: investments in fixed assets such as buildings, terrains, equipment and gains from such investments. The point is that investing cash flow refers more to outflow than inflow and is nonrecurring.

The Financing cash flow is what you cash in from shareholders and investors or pay to lenders. Loans, stocks, and dividends are the main drivers of financing cash flow. These are not recurring, but planned operations and are part of the long-term business strategy.

Profit is not enough. Check the cash flow

Having a profitable business doesn’t imply that your company is doing well. You may have a good profit, but a poor cash flow. This means that you are not able to operate current payments, which may interfere with your activity, affect sales and even the future of the company. It is all about having the money at any time to pay all you need to support the business (salaries, suppliers).

To sum up, whether it is about growth strategy or just maintaining a sustainable activity, cash flow is the best indicator of how well your business is doing and what you can/need to do. Not cash, nor profit, but cash flow.

To make things easier, manage your cash flow using a tool that incorporates all necessary operations and can run scenarios or deliver reports. Having all in one place with one-button-away reports gives you better control of the cash flow. That’s what ThinkOut does.