Cash Flow, the Oxygen of Business

| 4 minute read
Matt Knight
Author Matt Knight
The saying goes, ‘Cash is king’ but it’s much more than just that. 

In the business world, the equivalent of oxygen is cash. You can’t function without it.

Cash flow – the constant inflow and outgo of cash in a business operation – is literally the lifeblood of any business. It’s also one of the biggest, if not the biggest, issue that small business owners and entrepreneurs face.

This might sound pretty obvious, if a business isn’t earning enough money then clearly it will go out of business. On the contrary, you can be running a successful enterprise but if there’s more cash going out than coming in – then we have an issue. The business can be profitable, yet still be “negative” in cash flow.

How does this happen?

One reason could be that businesses are having trouble collecting receivables. Businesses that sell to their customers on credit (e.g. allowing clients to pay 30 days after the service or product has been delivered) have what is called ‘accounts receivable’. If a business is having trouble collecting its accounts receivable on the due date, then we could have a serious cash flow issue. More often that not, clients or customers are slack and don’t pay the invoice until 90 days after it was issued. This is an issue, talk to your customers or ditch them – it may sound counter intuitive but you can’t afford to be paid 90 days after the invoice was issued.

Excessive overhead costs. Does your business need to be paying $x amount in rent, utilities, staffing, equipment etc. etc.? This can result in more money being drawn out than is coming in from sales. Is the business running lean enough or is there an excessive amount of costs going out and in turn, dragging the business under?

Too much inventory. If you’re a product based business, inventory represents cash. Having too much of your cash tied up in sitting inventory can drag the business into a cash deficit. If the inventory is not moving, or is very slow off the shelves – it represents dollars sitting on the shelf that have yet to be turned into hard cash.

Weak gross margins; where a business makes money is in the selling! The pricing of services and products must accurately reflect the true cost of delivering or producing the product or service. Another word on this; sell! Make sure you’re getting out and selling directly to your customer or business. The more we sell, the more profit we receive, which should reflect in the cash flow!

Understanding what causes cash flow issues is the key to overcoming them.

Often business owners get so caught up in the day to day, they don’t have time to do a cash flow analysis which could be the key to helping them stay afloat and in turn, sustainable.

Take some time out to address your customers, costs and your cash flow.

Cash, just like oxygen is critical for businesses to survive.

If you get a constant cash flow stream, your business will not just survive, it will thrive.

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