Keep Cash Flow Flowing

I’m sure you’ve heard the saying cash flow is king, or as I like to say, queen. But what does that really mean, and how do you keep your cash flowing?

It’s a fairly simple concept but it can be difficult to get it to work.

Basically, what it means is keeping enough cash in the company bank account to cover upcoming expenses. Like I said, sounds simple. However, the reality can be much more complex.

Let’s take a starting point and walk through the pieces.

For example, you start the month with $10,000 in the bank. Of course, you have expenses, but you also have income, right? Well, hopefully.  

Cash flow is about the timing of the money coming in vs the money going out.

Let’s say you have payroll twice a month that is $2,000 each time. And all your other expenses combined equal $3,000. You know you are going to have $7,000 in expenses.  

Don’t forget though, you’ll probably have to pay for some COGS (cost of goods sold) or inventory along the way, too. Let’s say that runs another $5,000.

If you take the $10,000

• Minus payroll       $4,000
• Minus expense    $3,000
• Minus COGS        $5,000
• You’ll end with    $-2,000

Well, that will never do! You’re in business to make money, not go broke.

Depending on the type of business you have, you may bring in money from direct sales (retail, restaurants, etc.) daily. Or you may invoice your clients and they pay you at a later date. Either way, the key to successful cash flow is bringing in enough money in a timely manner to cover what is due when it’s due.

The tricky part is knowing what is due when and how much is coming in when.

Then you can line things up and be sure you have collected enough to cover your expenses on time.  

All of this is dependent on your sales being high enough to more than cover your expenses and COGS. 

If you are dependent on daily sales, it’s a bit of a wild ride not knowing if you will have sales or not.  Some days are good, some not so much.  The goal is to set a daily sales goal so that when all the days are added up you exceed the amount you need on a monthly (or whatever period you’re looking at) basis. Some businesses swing seasonally as well, so you need to plan ahead to keep enough cash on hand to make it through the slow times.

If you invoice your clients for work done, then the key is actually getting your invoices out to them in a timely manner.  

This is probably the number one problem I see when someone is having cash flow issues. Either this or just not having enough in sales.

If you are a service business and you get behind on your billing, then the whole cycle gets out of whack, and you end up in a cash flow crisis.

Think about it. If you work hard doing billable time for a client one month, then forget to invoice them at the end of the month, and their terms are net 30 (meaning they have 30 days to pay) what happens in 30 days?  If you haven’t sent out the invoices for the work you did the previous month, you won’t have any money coming in, even though you did the work!  

Therefore, not only do you have to earn the money, but you also have to invoice for it and collect it in order for it to come in and be there when you need it.

There are a couple of other factors to bear in mind, but suffice it to say, if you focus on bringing in sales consistently, you can stay cash positive and ride out the ebbs and flows of your expenses without running out of money.

Learning how to keep an eye on money coming in and money going out will help you tame the tiger and stay on top of your cash flow. It’s a critical component of every successful business. Knowing what it takes to keep your cash flowing will keep your doors open and your business growing.