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Why Is Cash Flow King?

By: Cash Miller

First off what is cash flow? This is how I explain cash flow. It is the amount of money you have left during a given period of time once all your bills are paid. But let us not confuse this with profit and loss statements. Cash flow is a physical thing, how much actual cash is left in the bank, while profit and loss statements are recordings in your financial statements but don't reflect physically held money. And what you have physically available at any one time is the most important metric for your business.

Now if you run a retail business that generates immediate cash from each sale then cash flow and profit and loss statments will more closely reflect each other. But if your business is in the position of having to bill your customers and then waiting to get paid then cash flow becomes the more important of the two.

So that we can fully explain what cash flow is we'll compare it to a profit and loss statement. Over the course of a month or year you'll make sales to customers and you'll bill them at either the time of the sale or once the order is filled depending on the business you're in and the accounting methods you use. When you buy something or pay someone you account for the money right away even if you have thirty days to pay them. Again this depends on your accounting methods but for many small businesses this is the simplest method of accounting to use. Once a bill comes due you pay it.

With cash flow we don't worry about what is billed but instead we worry about how much money is actually collected. On the other end we worry about how much money we actually give to our vendors, employees and other people we owe money to. To stay in business we have to keep paying them. We may be late on occassion but that bill isn't going anywhere till we pay it. So cash flow in it's most basic form is how much money we collect and how much money we send out. For any business that has to give credit to it's customers this is where we can have a problem. Not all your customers are going to pay on time.

It is totally possible for a company to show a profit while in fact losing it's shirt. Inevitably your going to have customers that can't pay their bills on time. This of course can be for any number of reasons. The one's you'll need to watch out for are the one's that don't have the money to pay you. That's the one you could end up facing yourself if you're not careful.

Ideally the amount billed in a given month and the amount collected will be virtually the same or you'll have collected more than you sent out. Then it becomes a simple matter of managing your expenses. If we lived in a perfect world than that would be the way it goes but we know better. What needs to happen is that you start to manage your cash flow. You need to make sure that what you are spending isn't exceeding what you are collecting not what you're billing. Hopefully you have a credit line with your bank that can help alleviate the problem but if not you need to be very careful or you might wind up using something like your credit cards to help cover the bills. This can only be considered a short tern fix. But it will compound the problem later.

So while your profit and loss statements are in themselves just as important as ever the real gauge of your companies immediate health might better be found in your cash flow statement. Because ending up with a negative number on that balance could eventually leave your bank account empty.

Article Source: http://www.articlemanual.com

Cash Miller is an experienced entrepreneur and speaker who has spent over a decade as a small business owner. His years of experience in small business cover such topics as planning, management, marketing, human resources, ecommerce, and taxation. If you are looking for more information on this subject and others related to starting and running a small business you can visit his website at www.SmallBusinessDelivered.com



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