Cash Flow – Its Role in Keeping Your Doors Open
We’re always watching what’s trending – economically, politically, globally – to better understand what’s important and what priorities we should be addressing to do well in the current business climate. Cash flow is always a priority – that doesn’t change, no matter what else is trending – and cash flow forecasting is an activity you should never overlook.
Since we are dealing with what seems to be a perpetually unpredictable future, we need to get better at developing models for how we look at cash flow.
As essential as it is to understand cash flow and have a handle on its management in order to keep your doors open, most business owners don’t predict their cash flow. Many have what they consider “intuition” about cash flow. If you happen to use this “method,” do you monitor your intuition against actual data? If not, you may be making critical business decisions that are not founded in fact.
You can run a business at a loss, but not without cash – it’s the lifeblood of any business. Your cash flow statement tracks the movement of cash through your business during a particular period of time.
Positive cash flow means that more cash is coming in than going out, negative cash flow means more is going out than coming in. All businesses have periods of both. Different types of cash flow may also be positive or negative.
There are three types of cash flow:
- Operating cash flow is the amount of cash generated by day-to-day operations which may fluctuate based on working capital, receivables, payables, etc. Your operating cash flow must be generally positive to produce long-term, positive cash flow.
- Investing cash flow is money you return to your business purchases of needs like machinery, furniture, or computers. If you don’t borrow money for these expenses, you are using cash flow from operations to reinvest. Investing cash flow numbers are often negative.
- Financing cash flow is money that is used to pay investors and creditors. If you take on debt now or in the future, keep an eye on financing cash flow over time – it can be either positive or negative.
How these types of cash flow add up reveals your overall cash flow situation. Negative cash flow is not necessarily a negative for your business as long as it is not negative long-term. The ability to monitor the status and direction of your cash flow requires that you put together a cash flow forecast.
Watch my short video to refresh your understanding of cash flow and cash flow forecasting. Then contact me to schedule a complimentary call if you have questions or would like to discuss your unique cash flow forecasting needs.
