It never hurts to go over basics, especially when it comes to the financial health of your business. Let’s review some basics before we determine if your business is managing cash flow efficiently.

What is Cash Flow?

You could probably infer what it is just from the name. It refers to the movement of money and its relationship to a business. More specifically, it is the measure of how money moves in and out of a business.



Businesses are sustained by the money that flows into them. The simplest way in which this happens is a cash transaction at the point of sale directly from the consumer to the company.

For example, paying for a meal at a restaurant. Of course, there are many other ways money can be transferred to a business. Often, clients don’t pay at the time of purchase. In this case, a portion of the cash flow comes from the collection of accounts receivable.



Invariably, money also flows out of businesses. It can be in the form of payroll, advertising, production cost, taxes, rent, and other accounts payable. This is simply another part of operating a business of any size.


Is Cash Flow Important?

It certainly is. Naturally, for a business to thrive and continue to grow it needs to have more money coming in than going out. This is called being cash flow positive. If the opposite is true, the business won’t be able to sustain itself for very long. Running out of cash is the number one reason businesses fail.

Since it’s so important, knowing your company’s cash flow status is essential. This is where cash flow statements come in.

These statements report on the movement of cash in three main categories:

Operating cash flow: This measures the cash received or used for the day-to-day operating activities of your business.


Investing cash flow: This is an assessment of the cash used or generated from the purchase or sale of assets. Theses include bonds, securities, equipment, or other fixed assets for your business.


Financing cash flow: This is the net amount of funds used to finance your business in any given time period.


By combining these categories, you can obtain your company’s net cash flow. This information provides an accurate way to assess the financial health of a company. Cash flow statements are frequently used by investors and analysts to determine the value of a company’s stocks.


Positive Cash Flow and Profitability

The difference between positive cash flow and profitability is all about timing. You can measure whether a company has a positive or negative cash flow at any given moment.

Profitability, on the other hand, takes a bigger picture into account. It’s entirely possible to experience multiple negative cash flows throughout the fiscal year and still turn a profit for the year. The opposite is also true. This is what makes an attention to both concepts so important.

While they don’t exclude the possibility of turning a profit, chronic negative cash flows can put a business in trouble. Retaining profitability is essential for the success of your business, but having positive cash flows is vital to its day-to-day financial health.

Negative cash flows at the wrong time can mean not having enough money for payroll or rent. You might be put in the position of having to take loans out to keep your otherwise profitable business afloat.


Managing Cash Flow – Why?

Since cash flow is such an important indicator of your company’s well-being, managing it is an effective way to ensure your business stays out of financial trouble.

Cash flow projections and forecasts can give you an accurate reading of what’s going to happen to the amount of cash you have on hand. It’s a prudent way to keep things running smoothly. To keep your cash flow projections accurate, regular maintenance and updating are very important.


Be Prepared

One of the biggest advantages of managing cash flow well is that it can keep you prepared to handle times when money is tight.

Unfortunately, cash flows are different each month. For this reason, it’s wise to constantly keep an eye on your cash flow. By doing so you will be able to notice patterns in how your cash flow changes throughout the month and take action to be adequately prepared.


Mitigate stress

There’s a psychological advantage to managing your cash flow, too. With regular, accurate management and forecasting you won’t have to waste energy wondering if you’re going to come up short for an expense.

Staying informed and prepared reduces anxiety and will let you perform at your highest level.


Encourage Trust

It’s no surprise that creditors and investors have a great deal of interest in the status of your cash flow. It’s a great indicator of how equipped a business is to handle unexpected costs, and outsiders are right to be wary of businesses with unstable cash flows. This reflects the healthy attitude that successful business owners take toward their own business.

Thus it’s also important to have some extra cash on hand whenever possible to survive short term difficulties in order to achieve long term success.


Managing Cash Flow – How? 

Emergency Fund

As mentioned above, having some extra cash to bail you out in a pinch is a very good idea. It’s part of responsibly managing cash flow.

Billionaire Bill Gates talked briefly about having extra cash flow during a 2018 interview with Ellen DeGeneres. He says one of his main concerns during the growth of his company was having enough money to pay his employees. He mentioned wanting to have enough cash to support his business even if his clients didn’t pay for one year.

This is on the extreme end of things, but it shows just how important the concept is. Many businesses aim to have a big enough cash balance on hand to support one month’s operational expenses at any time. The right number, of course, depends on the size of the business.


Accounts Receivable

Waiting for long periods of time to see cash inflow from sales already made can be a great hurdle when it comes to maintaining healthy cash flow. Work performed and resources used on your end of a sale might not see a financial return for months in some cases. This obviously puts a strain on your business and makes predicting cash flow more difficult.

Fortunately, there are ways to decrease the waiting time and get paid faster. Utilizing digital invoices and processes is a great way to speed up the process dramatically. Another useful method is to follow up with unpaid invoices by issuing late payment reminders at regular intervals. In conjunction with reminders, consider implementing late payment penalties or offering discounts for early payment.

Unpaid invoices have a serious effect on your business, especially small B2B businesses. This 2015 Euler Hermes report showed that B2B companies typically experience longer payment delays than average. Taking control of the money flowing into your business is a crucial step to achieving financial stability.


Managing Expenses

On the other side of cash inflow is, of course, cash outflow. It’s equally important to manage business expenses as it is to make sure your accounts receivable are being collected in a timely manner. Having a strong understanding of how your business experiences both aspects of cash flow is the best way to stay solvent.

This is another area where cash flow statements and projections come in handy. By examining where and when your company’s funds are being spent you can identify ways to avoid negative cash flow at the wrong time.

Examples include cutting back on inventory spending during months when you’re selling less. It also means looking at expenses that are disproportionate to the money coming in. Since cash flow is all about timing, this includes tax-deductible expenses. Creating and sticking to a regular budget is a key part of effectively managing cash flow.


Need Help with Managing Cash Flow?

Cash flow management is one of the most important business activities when it comes to financial security. Doing it effectively enables you to know when and how cash flows in and out of your company. It keeps you safe from unexpected expenses and demonstrates the health of your company to investors and creditors.

Take the necessary steps to help your business stay ahead and continue to grow. Maintain a healthy emergency fund, expedite the payments your company is owed, and manage expenses intelligently. It’s the best way to keep your business safe and thriving.

Or let the experts at Saddock Advisory help. When can help your business with its financial health, so you can focus on leading it.

Get in touch with us here to see which of our services can help you the most!


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Is Your Business Managing Cash Flow Effectively?
Cash flow might be the most important aspect of financial health for your business. We explain why and how to effectively manage your business' cash flow.

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