Cash flow basically is just a term given to the movement of money in and money out of a business. The net effect of the two is called ‘Net Cash Flow‘ and when you run a business careful management of your cashflow, in conjunction with making profit is key to your success – after all cash flow is the reason 82% of business fail!
Examples of Cash Flow Inflows
Customer receipts, bank interest or a business loan are all examples of money that may come in to your bank account.
Examples of Cash Flow Outflows
Supplier payments, wages, bank charges and loan repayments are all examples of money that may go out of your business.
What is Cash Flow Management
A business needs cash, as well as profit, to operate. Think of a start up that is in the early stages of developing a new product to take to market. The start up needs to fund salaries and overheads while it develops it product before it can start making sales and profit. The start up needs to firstly work out how much cash it needs to survive until it starts making profit and manage its monthly payments carefully because if it can’t pay its salaries each month the final product will never be completed. This is cashflow management.
Profit v Cashflow
When you run your own business investing time and understanding in knowing the difference between cash and profits will be the making of your business.
No matter how much profit you may be making, you need to make yourself aware of all the things you need to pay (like salaries or rent) or upfront payments you need to make to deliver your projects/products that can’t be delayed and how you will balance this against when you expect your customers to pay you.