Positive cash flow is the life blood of all businesses. Without it they die – eventually!!  Overstating the issue of business cash flow problems, you say?  I think not!  Without positive cash flow, a small business has big cash flow problems; lack of solvency being the likely key business issue.

Let’s be clear what I mean for a moment. Positive cash flow is where cash received into the business exceeds cash paid out, and negative cash flow is the opposite.  It is where cash paid out by the business exceeds cash received by the business.  Cash flow problems arise when a business has negative cash flow – more money going out of the business than is coming in.

Consider the ‘life blood’ analogy further. We all have blood moving around our bodies.  If we lose most or all of our blood, we die!!  It is the same in business.  If a business has no cash within it, it will eventually die!  I learnt from my own experience in business as a young entrepreneur, that one cannot pay bills, staff salaries and oneself on profit alone!

Profit is exceptionally important to business, and positive cash flow is too. They are two of the most critical drivers of a business.  My favourite phrase in business is:

Turnover = Vanity; Profit = Sanity;  Cash flow = Reality!!

The key transactions that impact cash flow are:

• Sales (cash and credit sales)
• Purchases (stock and business expenses)
• Business loans (new loans and repayments)
• Business assets (buying and selling assets)
• Investments (repayments and new investment)

In simple terms, to be financially successful, a business needs to be cash flow positive. That means more cash needs to be coming into the business than is being paid out.  Look at this simple example of a profitable business.

Let’s assume Smith’s Limited has just established taking a new product to market where sales will be $1,000 in month one, and then will double each month thereafter. Customers are given the fairly standard 30 day payment terms.  However, Smith’s Limited has to buy its stock for cash, as it is a new company with no credit history with the supplier.  The stock will cost 60 percent of retail price.  General business expenses will be 20 percent of gross income each month, and are paid by month end, at the latest.  Look at the profitability and cash flow effects of this opportunity after six months in business as shown in Tables 1 and 2.

	Month 1	Month 2	Month 3	Month 4	Month 5	Month 6	Total
	$	$	$	$	$	$	$
Gross Income	1,000	2,000	4,000	8,000	16,000	32,000	63,000
Less COGS	(600)	(1,200)	(2,400)	(4,800)	(9,600)	(19,200)	(37,800)
Gross Profit	400	800	1,600	3,200	6,400	12,800	25,200
Less Expenses	(200)	(400)	(800)	(1,600)	(3,200)	(6,400)	(12,600)
Net Profit	200	400	800	1,600	3,200	6,400	12,600

Table 1 – Smith’s Limited – Profit and Loss Statement for Six Months

	Month 1	Month 2	Month 3	Month 4	Month 5	Month 6	Total
	$	$	$	$	$	$	$
Cash In	0	1,000	2,000	4,000	8,000	16,000	31,000
Cash Out	(800)	(1,600)	(3,200)	(6,400)	(12,800)	(25,600)	(50,400)
Cash flow	(800)	(600)	(1,200)	(2400)	(4,800)	(9,600)	(19,400)

Table 2 – Smith’s Limited – Cash flow Statement for Six Months      

What do you notice? The profitability of Smith’s Limited is $12,600 profit for six months.  However in the same period, it also has a negative cash flow of $19,400, which means more cash is going out of the business than is coming in. If this was a real life situation, Smith’s Limited would have a major cash flow problem, especially if it had limited cash flow reserves in the bank.  If the company is relying on a bank overdraft to fund the negative cash position, it could be scary for the company, as negative cash flow is the same as bank overdraft, and it is continuing to get bigger each month.

In this situation the accountant will say, ‘Well done for a start up business’, but the bank manager may well be saying, ‘No, we won’t extend your overdraft further’ or worse, ‘We are cancelling your overdraft’.

While this is an imaginary example, it is designed to demonstrate the point that if cash is not managed carefully, a successful business can be crippled and die!!

Reading is one thing, but implementation is another. Please look at your own business’ cash flow, and ask yourself, ‘Do I have cash flow problems in my small business?’.  Be honest as your business relies on you to be so!

Ensuring your business is consistently cash flow positive will help you to create a financially strong and viable business, and it will help you sleep at night, not having to worry about where the cash is coming from to pay yourself, your staff and business expenses. Now, that sounds good to me!

If you would like to learn more on how to address the cash flow issues in your business, then please go to www.adelemclay.com/free-resources and download my SPEARHead System™ – 50 Strategies For Supercharged Small Business Cash Flow.

 

Could some guidance from me be helpful to you?  If so, please arrange a free 30 mins Skype strategy meeting with me.  Here’s my calendar to book a meeting.  I’d love to support you in some way to gain ‘seductive clarity’ in any aspect of your business or life.

 

Other articles on Small Business Cash Flow:

Small Business Cash Flow – The Ultimate Guide
Cash Flow Problems in YOUR Small Business
Cash Flow in Business
Cash Flow Projections – Important in Business?
Projected Cash Flow – Relevant in Business?
How to Solve Cash Flow Problems: Inventory Turn
Small Business Problems:  Why are YOU in Business?

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