“Cash flow is of vital importance to the health of a business. One saying is: “revenue is vanity, cash flow is sanity, but cash is king, ” according to The Times 100. “What this means is that whilst it may look better to have large inflows of revenue from sales, the most important focus for a business is cash flow.”
“Many businesses may continue to trade in the short- to medium-term even if they are making a loss. This is possible if they can, for example, delay paying creditors and/or have enough money to pay variable costs. However, no business can survive long without enough cash to meet its immediate needs.”
Many small business owners ask themselves, “Do I have enough cash to pay ‘______’?”
Unfortunately, that is the absolute worst question you could ask yourself. Because knowing exactly where you stand financially (i.e. your cash flow) is critical to your business success. Your company’s survival hinges upon your ability to cover all taxes, payments to suppliers and operating costs as they come due.
Why Cash Flow Questions are Bad for Business
You’re probably wondering: “If cash flow is so vital – why is this question so very bad for me and my business?”
There are common mistakes that I see small business owners making every single day – relating to this question. Here’s a look at 3 common cash flow mistakes and how to preclude them in your business and stay on top of your cash flow position:
1. Are you looking for cash flow in all of the wrong places?
When you ask yourself the “cash flow question,” it is probable that the next thing you will do is pull out your smartphone or your laptop and sign in to your business checking account to review your current balance. Unfortunately, your business bank account merely shows your cash on hand. It will never show you what your cash flow is or (more importantly) how to improve it.
The realization that you do not have any cash is not enough. It is important to know what your cash flow position is and specifically where cash is trapped in your business. Once you know where the cash is trapped, it is a lot easier to unlock it and make it available for use in your small business.
2. Are you relying on a cash position estimate?
Stop relying on a cash position estimate. It is a common mistake that most small business owners make however, it is not entirely your fault. The culprit is generally incorrectly labeled accounting reports.
Most accounting software packages contain a report that shows your bank balance and lets you project what your future cash position. They often incorrectly label this a cash flow projection. In reality, this type of report is very subjective. It takes your bank balance and adds all the sales you might have in the future minus the bills you might pay. Unfortunately, this involves a lot of speculation about what might or might not happen in the future.
This type of report does not give you a clear picture of what you need to do to unlock cash in your business. More often than not, this exercise will lead to you to focus more and more of your time and resources on sales – an activity that can actually worsen your cash flow position. Especially if you sell on credit terms or if you sell stock that you need to order in and pay for today.