Managing your cash flow may be the single most important business planning activity you perform, in good times or bad. Whether you are wondering if you can afford that next hire, take a dividend or simply make the upcoming payroll, an understanding of your current and future cash position will arm you with your answer.
Cash Flow Management 101
Cash flow management is simply measuring and influencing the inflow/outflows of cash to/from your business and the resulting change to your cash balance.
How Cash Flow Differs from Profits
Too many owners breathe a sigh of relief and move onto other issues when they see a positive net income, taking it as a proxy for cash flow. Your income statement presents the money earned in a specific period. However, the timing between earning revenue and getting paid often varies. So does the timing between incurring an expense and cutting a check. Therefore, the actual cash inflows and outflows often deviate from net income. For example, if sales drop in January, the cash balance might be OK for the next 45 days while the accounts receivable balance shrinks but without new sales in a hurry your cash position will soon be strained.
Therefore, the income statement presents only part of the picture and it should be used in conjunction with the other key financial statements.
Keep in mind that profits don’t pay bills, cash does. Just because a firm is profitable doesn’t mean it won’t run out of cash.
More Cash Flow Tips
Here’s a separate article with “4 Steps to Useful Cash Flow Projections” which gets into many more specific tips and important concepts.
CONVERT YOUR FINANCE FUNCTION INTO AN ADVANTAGE
At Driven Insights, we show business owners how to find and use the hidden intelligence in their financials to accelerate growth and increase profits. Ask us how our outsourced accounting services will help you make the upcoming year more successful than ever.