The Importance of Good Cash Flow
Proper Cash Management Is More Important Than Profit and Loss
Sep 1, 2008
Often a small business owner will concern themselves with their profit and loss statements first and all the other indicators about the health of a business second. If this is the case for you then you may be making a grave mistake. Of course you want to know if your business is making money or losing money but neither one will tell you if you are going to have the actual cash to pay the bills. That’s where a cash flow statement comes in.
Your Cash Flow Statement
Your company cash flow statement is actually a better indicator for determining the health of your business. To explain it is pretty simple. The statement tells you exactly how much money you are collecting over a certain period of time, say, for example, each month, week, or day. If you have a business that collects cash on a daily basis then you can track your daily average. But if you have to wait 30 days or more to see a check then you track how much you take in on an average week or month.
Money in and Out Your Door
Your next point of concern is how much physical cash goes out the door each month or week. The typical timeframe is a month because once a month you pay rent and utility bills. Your basic bills have to be paid to keep the doors open. Bills from suppliers can be juggled some but the power bill must get paid. So what you are looking to find out is exactly how much cash is going out the door each day.
Cash Flow Versus Profit and Loss
Are you sending out more money than you are taking in? Cash flow statements and profit and loss statements can have entirely different sets of numbers. And it is very possible to be showing a profit each month while your business is going under. All it takes is the people you do business with failing to pay you on time or not at all. If this happens often enough then you can quickly find yourself in a cash crunch bind.
Revolving Credit Is Key
If your business does rely on other people paying their bills on time then you may want to establish some sort of revolving credit line with your bank assuming of course that you haven’t already. This can allow you access to funds at a low interest rate just in case you do have a shortfall during the month and are struggling to come up with enough money to pay a bill or two. And using a cash advance on a credit card is not the same thing. You’ll get killed on the interest rate and pay an advance fee as well. Your credit cards are not an option you really want to consider. Approach your bank about a revolving credit line. It can save you a lot of money. Remember the key to your finances is good cash flow.
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