I get this question a lot…”My business is profitable, so why is there no cash in my business?” In an ideal world, profit should be equal to cash in the bank. But, in reality, that is not the case. We’ll go through a few reasons why that may be and help you understand why monitoring your cash flow is extremely important.
Here’s a famous quote before we begin: “Revenue is Vanity, Profit is Sanity and Cash is King” – Alan Miltz
As a business owner, you should be aware of the three categories of cash flow in your business. You may not have all of them at once in your business, but you will usually have at least two.
Operating cash flows
Basically, the cash coming in from sales and cash being paid for purchases and expenses. We don’t look at how much revenue you billed out to customers here, we look at how much money came into the bank account.
So if you sell your products and services on credit and your customers are not good payers, this can harm your operating cash flows.
Vice versa, if you pay for all your purchases on delivery, then you are also harming your cash flows. If you customers are taking long to pay you, you don’t have enough money in the account to pay for your purchases as well as salaries.
Financing cash flows
This is the cash you have to pay out of the business for loan repayments. If you borrowed money from the bank or another lender, the cash coming in would be classified under a financing cash flow as well as the cash you must now pay back monthly.
When you submit an application to the bank or another lender for funding, they look at this cash flow category as well as operating cash flows. They want to see how much cash from operations is available to pay off existing and their “new” loan. If your operating cash flows is not looking healthy and this section already has a high amount of cash leaving the business, then obtaining new loans will be a challenge.
Investing cash flows
This section deals with cash that you as the business owner put into the business and take out of the business. So, when you started the business and put some cash into the business bank account, that would most probably have come from your personal funds or borrowed from a family member. That cash would have been classified in this section.
As your business starts to make cash and you are able to pay yourself back the money you borrowed to the business, those cash payments would also be categorised here.
As your business starts making good profits and the cash flow position is stable, you can start paying yourself dividends. That cash you pay out as dividends would also fall into this category.
Lenders also look at this section when they review your business’s set of financial statements. They want to see how much cash from operations after paying for loans are you keeping in the business or paying out to yourself.
Why is managing cash flow important?
The cash flow in your business is like the fuel that runs your car. If your car runs out of fuel, it will stop. The same is true for your business. If there is no cash flowing through your business, it will close down. There will be no cash coming in from sales and no cash to pay your suppliers and employees. You will not have a business. Managing your cash flow therefore, is very important and understanding when and how cash flows into and out of your business is critical to ensuring that your operation does not stop and that you are able to build a growing and sustainable business.
Need help?
Contact us so we can understand your challenge and develop a plan to guide you on how you can manage your cash better in your business.
