As a business owner, you’ll be familiar with that old balancing act of money out versus money in. And whilst profitability is definitely something you should be paying attention to, the best way to really understand your short-term and long-term survival is to look at your business’s cash flow. Specifically, whether or not you are cash flow positive. So, what does this actually mean?
To put it simply, when your company is cash flow-positive, it means your cash inflows exceed your cash outflows. In order for your business to function, you need money in the bank to pay your employees, purchase inventory or raw materials, and to cover any other operating costs you may incur. To do this, you use either working capital that’s been invested in your business or the money you’ve received from sales and receivables.
Issues arise when an otherwise healthy company—one that makes more money than it spends, with a high demand for its product or service and a strong volume of growth—struggles with the timing of expenses relative to sales. Even if the long-term financial trajectory of your business is strong, you can quickly run into cash flow problems if you spend more in the short-term than you’re bringing in.
*Remember: Your business can be profitable without being cash flow-positive—and you can have a positive cash flow without actually making a profit.
How to Calculate Your Cash Flow
Calculating your business cash flow tells you a number of things: Where your money is coming from, where it’s going, and how the timing of your inflows and outflows of cash work together. Here’s how you can figure out if you’re cash flow positive or not in four easy steps:
- At the very top, list the cash on hand at the start of each month. If you have multiple business bank accounts, add up all of the accounts that you have for your total cash on hand.
- Next, fill in your cash inflows and cash outflows i.e. your operating activities, investment activities, and your financing activities. The trick here, though, is to remember that we’re talking about cash—not invoices or purchases.
- If you send an invoice to a client in July, but it isn’t paid until October, you’ll mark that as “collections on accounts receivable” in October. Similarly, if you pay for a purchase on a business credit card in May, but don’t pay the credit card statement including that purchase until June, you’ll mark the expense in June for the purposes of the cash flow statement—because that’s when the cash outflow actually took place.
- After you’ve inputted all of your cash inflows and outflows in a given month, if your closing balance (in the last row) is higher than your opening balance (first row), your cash flow for that month is positive. If it’s lower, your cash flow is negative. Easy, right?
What Profit Doesn’t Tell You
Compare the calculation above with your business’s profit calculations and it becomes a lot clearer that your profit doesn’t show the whole picture of how your business is doing financially. Because profit doesn’t tell you when those inflows and outflows of cash are occurring, it’s not an ideal indicator as to your business’s financial well-being.
Profit doesn’t tell you if you’ll make payroll next month. It doesn’t tell you whether you can purchase a new batch of inventory. It doesn’t warn you that you could be instantly broke the minute the tax bill comes in. So, whilst it is an important measure of success, profit tells you nothing about survival.
How to Manage Your Business Cash Flow and Work to Become Cash Flow Positive
So you’ve just done the calculation and found your business to be cash flow negative? Don’t worry, there are a few different things you can do to manage your company’s cash flow in order to avoid a dangerous scenario. Here are some of the options you have available:
Maintain a Cushion
The golden rule of positive cash flow is ALWAYS be prepared for the worst. If you do have a negative cash flow situation in a given month, you don’t want that single fluke to permanently damage your business! That’s why it’s so important to have some amount of cushion in place in your cash on hand.
Take Steps to Get Paid Faster
Unpaid invoices are one of the biggest cash flow killers out there —especially for small B2B businesses, who are the most likely to suffer delayed payments from their business clients. Without being proactive about collecting payments from your clients, you could quickly find yourself in a dangerous cash flow situation.
Manage Your Expenses
Are there ways that you cut back on unnecessary expenses or wait to spend that money when you actually have it on hand? In some cases, the answer might simply be that you’re spending more on various one-off expenses than you can afford. Those “petty cash” costs can add up quickly to damage your cash flow. (Yes, even the tax-deductible ones!) Make a budget for your day-to-day expenses and stick to it.
Pay Attention to Estimated Taxes
For many businesses, April can be the ugliest month of the year from a cash flow perspective. Avoid a windfall of expenses each April by calculating your tax bill and putting a little aside each month in preparation.
Consider Alternative Revenue Sources
Managing cash flow can be particularly tricky for seasonal businesses for whose revenue varies dramatically at different times throughout the year, and for many, simply planning ahead isn’t enough. If you own a seasonal business and are struggling with cash flow, are there any alternative sources of seasonal revenue that you could pursue in the off season? Definitely something worth considering!
You Can’t Become Business Cash Flow Positive Overnight…
Whilst crossing over from a negative to a positive cash flow is certainly possible, it’s not an instant process. There’s no magic formula or switch you can flip to suddenly get back on track. Becoming and staying “cash flow positive” is a business process that may take a bit of time. But if you’re paying attention, tracking as you go, and making corrections as needed, you’ll get there in no time at all.