What is Cash Flow?

By March 14, 2018 March 3rd, 2020 No Comments

Being a business owner can sometimes feel like you are all alone in the world, struggling to get ahead just to make ends meet and cash forgetting about the advantage of understanding cash flow.  The challenges are great, but, nothing is more rewarding or gratifying than nurturing an idea through the different stages of business life to see it take hold, grow, prosper and become profitable.  As any business owner can tell you, getting to the prospering and profiting stage takes an immense mix of hard work, intuition, planning and even luck. It also takes a set of skills specific to each of the stages of business growth.

Perhaps the most important of these skills to master is the management of cash flow.  Of all of the small business struggles one can experience, this is the one that can shut a business down in the shortest amount of time.  Cash flow is the money that is moving in and out of your business in a month. Money comes in from customers or clients paying for services or products and flows out to pay expenses, rent, salaries, taxes, loans and other accounts payable.  If more money is coming in than flowing out, a business is “cash flow positive” and has enough money to pay bills and start to build up a reserve to cover times when cash flow is negative. If a business generates equal amounts of revenue and total expenses, in a given month, it has reached its break even point.

Break even point is an important number for business owners to know.  It makes it very clear just how much production (or income) must be generated in a given month to stay cash flow positive.  If at a given time revenues are lagging, it becomes the incentive to boost sales in an effort stave off losses in working capital.  In other words, the break even point is a target to reach for letting a business know that it is doing enough just to survive.

Once the idea of cash flow and the importance of being cash flow positive is fully embraced, the challenge for business owners is in developing and maintaining consistent, accurate bookkeeping and accounting practices.  It is of vital importance that these systems are put into place as early as possible. While it might seem like a less important task after marketing, selling and servicing customers; lacking in the knowledge of whether a business is making money, breaking even or losing money makes it impossible to make sound financial decisions on a daily, weekly or monthly basis.  It is a recipe for disaster.

Once a daunting and time consuming task, the good news is that in today’s world we have technology that can make number crunching a painless, seamless endeavour.  Flow Smart Accounting makes use of cloud accounting programs that make the process virtually automatic. Linking online services, like Hubdoc, that exports the information from hard copies of bills, statements and invoices and Bank Feeds that allows every bank transaction you make to flow seamlessly into a cloud based accounting program, like Xero, makes it possible to have a snapshot of the health of your business at any given moment, in real time.

The importance of automation, timeliness and accuracy cannot be overstated.  Every business is faced with a growing business ecosystem related to their industry.  This means more suppliers, competitors, distributors, customers and even government agencies all demanding that you make sound business choices with real numbers to inform on your decisions.  The only way to do this is with a set of books that you can trust implicitly with 100% accuracy. There is no better, or easier, way to do this than by making use of cloud based technology.

A further note on business in 2018 is that more and more millenials are choosing not to join the traditional 9 to 5 workforce.  They are working for themselves at an accelerating rate as freelancers in any number of industries and are fully embracing mobile technology available through smart phones and other devices.  In today’s world it is entirely possible to run every aspect of a business from a handheld device. Being able to know, with certainty, how much money is in that business at any given point is a powerful tool that past generations of business owners couldn’t even imagine.  

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