You hear the phrase, “Cash is King,” but then we see everyone paying for things with credit cards or smart phones and we wonder, does cash even exist anymore?
When it comes to business, cash doesn’t necessarily refer to the ‘cold hard’ stuff in your wallet, but instead it refers to money “…that is easily accessible and can be quickly turned into physical cash.” (Investopedia)
This could be bills and coins, or it could be money in checking or savings accounts.
Profit does not always equal cash
So, you did a lot of jobs, or your business sold quite a few products this past month. Your books show a profit. However, you haven’t received any payment yet. Despite the fact that on paper you are in the black, your bank account is looking rather empty. This is why it is important to keep track of cash flow and not just profit. Profits are not the same as readily available cash.
What is cash flow?
Cash flow refers to the money that is coming in to and leaving a business over a period of time. Ideally a business would have a positive cash flow, meaning more money is coming into the company than is going out. However, that doesn’t always happen.
Why is cash flow SO important
Why do you need cash? Most importantly you need cash to pay your expenses. These expenses could be mortgage payments, utility bills, payroll, suppliers anything. But, cash flow is about more than just paying bills on time.
Cash is key for being able to buy supplies in a few ways. The first and most obvious way is the fact that when you have no money, you can’t purchase anything, unless you do so on credit.
The second thing to consider is the fact that a steady cash flow gives you more buying power with suppliers. They will be more favorable towards working with you if they know you are someone who has the money to pay for things upfront or within the allotted time.
When you are able to pay upfront with cash, you have more of an opportunity to bargain and negotiate price.
And, If cash flow is ever slow, a solid reputation may make suppliers more apt to give you a little more grace.
Furthermore, a good amount of cash in the bank gives you the flexibility to buy supplies when you see good deals on them-even if you don’t need them right at that moment-but you know that you will use them in the future.
Stress and mental health
I recently spoke to a small business owner who referred to cash flow as being the bane of his business. The nature of his business, is that he is often doing big jobs for clients and then invoicing them. Cash comes in on a job by job basis and there is no regular flow. When his clients are late in their payments, suddenly his business suffers. It is hard to make payroll, hard to pay bills, and hard to buy supplies for any future jobs.
That is stressful.
A stressful work life can have serious health impacts. The American Psychological Association states, “Constant preoccupation with job responsibilities often leads to erratic eating habits and not enough exercise, resulting in weight problems, high blood pressure and elevated cholesterol levels.”
A chronic stress of worrying about cash flow can also impact the workplace culture and environment. Not only will your stress emanate, but employees are more likely to grumble and may not work as hard if they aren’t sure whether or not they will actually get paid this pay period.
Plus, when you are so focused on hypothetically looking under the cushions to find money to pay all expenses, it is hard to invest the time and energy into growing the business.
Growing and making more money
We’ve all heard the phrase, “it takes money to make money, right?” Though there is some debate, in many cases this old adage does still ring true. You may not necessarily need a big investor funding your company, but you do need money in the form of cash flow to keep things operating and growing. In fact, Kalen Smith tells us, “Many business analysts state poor cash management practices as the number one reason why businesses go bankrupt. ”
Cash gives you the ability to not only remain operational but also the freedom to make investments of both time and money for your business that will help you to grow.
Cash flow is important for ALL businesses, but some companies will struggle with it more than others. SaaS businesses with a subscription business plan may find that cash flow is easier to maintain than other types of businesses, but that doesn’t mean that tracking cash flow should be neglected.
For more information about learning how to track and manage your company’s cash flow, contact Lucid Advisory and Finance!