Is Cash King?
In our day to day work here at Larkin Partners, we’ve noticed that people’s default report when it comes to knowing their numbers is their Profit & Loss. Profit & Loss is, of course, a critical indicator of your business’ health, but if cash is king- and spoiler alert, it is – then your cashflow report is your go to. It is sad, however, that fewer reports that come from your accounting software seem to strike as much fear in the hearts of beleaguered business owners as the cashflow report.
Managing your cash flow realistically is absolutely essential for your business, regardless of whether you’re thriving or struggling. For many, it’s the key piece of pie to know your business survival. It’s not unusual for business owners to discover they’ve used a lot of their start-up investment cash, leaving them with a cash crisis that then prevents them from paying their loans, suppliers, buying the materials they need to earn income and even being able to pay wages or take out their own drawings. The time delay between the time you having to pay your suppliers and the time you receive money from your customers could be a problem. The solution? It’s cash flow management. But what even is cash flow management?
Important Cash Flow Basics
Put simply, cash flow is basically the movement of funds (cash) in and out of your business. There are essentially two kinds of cash flows in most businesses:
- Positive cash flow: This occurs when the cash entering your business from sales, accounts receivables/debtors, etc. is more than the amount of the cash leaving your businesses through accounts payable, monthly expenses, employee salaries, etc.
- Negative cash flow: This occurs when the outflow of cash in your business is greater than your incoming cash. This generally means trouble for a business, but there are steps you can take to fix the negative cash flow problem and get into positive zone. Cutting down on your business expenses is one of the quickest fixes.
Profit Does Not Necessarily Equal Good Cash Flow
You can’t just review your Profit and Loss statement (P&L) and think you’ve got a handle on your business cash flow. Many other metrics feed into factoring your cash flow, including your accounts receivable, inventory, accounts payable, any capital expenditures and your tax obligations. Effective cash flow management requires an individual focus on each of these drivers of your business cash, in addition to your Profit or Loss. Those old rules of accounting define Profit simply as “revenue minus expenses”. However, a smart business owner will understand that whether you earned a profit is not the same as knowing what happened to your cash.
Business owners usually learn one principle early in their professional life – “cash is king”, because building, and keeping, an adequate stockpile of buffer cash provides you maximum opportunity and flexibility in your business while enabling you to sleep soundly at night. Without cash in the bank, your net profit is meaningless. Many profitable businesses on paper have ended up in bankruptcy because the amount of cash coming in doesn’t compare with the amount of cash going out. You need to have good cash flow to survive. Enter the cash flow report.
Typically, businesses track cash flow either weekly, monthly or quarterly. These critical numbers tell you just how much is coming in and how much is going out of your business. Making more than you’re spending? It’s all good. Cash flow regularly edging into the negative zone? Not so good.
Cash flow is, bottom line, a clear indicator of the health of your business. If you’d like some specialist support moving across from P&L to cash flow reporting, please reach out to us at info@larkinparnters.com.au or call the office 03 9853 4754. Knowledge is power, after all!