Get Your Business Cash Flow Positive ASAP
July 7th, 2018
The biggest balancing act you’re always performing as a business owner is money out versus money in. And although profitability is certainly something you should be paying attention to, more than anything, the best metric to understand your short-term and long-term survival is by looking at your business cash flow. Specifically, whether or not you’re cash flow positive.
We’ll go through the meaning of cash flow positive, show you what good cash flow is, and what steps to take for you to get your business cash flow positive as soon as possible. Or, if you don’t have time to do the reading, watch this video below for the cash flow positive definition, and the essential tips you need.
What Does It Mean to Be Cash Flow Positive?
In order for your business to operate, you need money in the bank to pay your employees, purchase inventory or raw materials, and cover all your other operating costs. 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.
The problem comes in 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 get into hot water with your business cash flow if you run out of cash by spending more in the short-term than you’re bringing in.
Why Being Business Cash Flow Positive Is Crucial for Survival: An Example
Imagine that over the course of a month, your company has a sales volume of $50,000. At the beginning of the month, you estimate your costs in rent, payroll, and raw materials at about $46,000. That leaves you with $4,000—in profit, right?
But a few of your bigger clients are other businesses for whom you had to send invoices for some of that $50,000. Some payments are still outstanding. And for a few more sales, you’re still waiting for payments to process through the credit card company—so that money hasn’t actually hit your business bank account. By the end of the month, you actually have a cash inflow of $45,000, with $5,000 in receivables still outstanding.
In that case, then, you’ve spent $1,000 dollars more than you made.
So, although it’s true that a single instance of negative cash flow might be no big deal, consistent patterns of negative cash flow can be the downfall of an otherwise successful company. If this happens three, five, or 10 months in a row, all of a sudden you’re out tens of thousands of dollars. Even if a large contract comes through, you might not be able afford to cover your rent and pay your employees until then, and your business might not actually make it to the end of the year.
Business Definitions: Cash Flow Positive vs. Profitability
Many newer business owners hear the term “cash flow positive” and assume it means the same thing as profitability or “breaking even.” However, although the two terms are related, they’re not actually the same thing. As it turns out, you can be profitable without being cash flow positive—and you can be cash flow positive without being profitable!
Cash flow meaning: When you hear the term “cash flow,” it’s referring to the total amount of cash that’s being transferred in and out of your business. In order to be cash flow positive, you need to have more money coming into your business than is going out at any given time.
Profitability meaning: Profitability, on the other hand, measures a bigger picture number. Your profit is what you have left after all of your expenses are paid. At the end of the year, did your business make more money than it spent? If so, you’ve turned a profit for that fiscal year—but you might’ve done so even while having several scary bouts of negative cash flow at various points throughout the year.
