Cash flow is king
As business owners and managers guiding the finances of an organization, or individuals dealing with the household budget, it doesn’t take long to understand the old saying “cash is king.”
We need cash to pay rent, the mortgage, meet payroll or pay bills.
In business it is easy to become enamored with revenue growth and profitability. While both are admirable pursuits, they do not guarantee the long-term success of an organization. Financial statement profitability is a function of accounting standards, rules and theories. An organization could have fantastic revenue, reasonable expenses and significant profit, but still have negative cash flow.
At various points during an organization’s life cycle it may be necessary to endure periods of negative cash flow. Without proper cash flow planning, events such as entering a new market, launching a new product, economic downturns, purchasing capital equipment, mergers and acquisitions, or other cash-intensive events could easily complicate the task of paying monthly expenses.
Being able to forecast your cash flow can help you make important decisions about the future, and good cash flow management could be the difference between success and failure. It doesn’t matter if a business is a one-person service business, or a 50-person, 100- or 200-plus-person business, every organization needs some level of a cash flow forecast.
A crystal ball is not necessary as the projection will likely never be 100 percent accurate; however, with consistent monitoring and updates, the accuracy of the projection should improve. Remember, the goal is to take the surprise out of your cash flow situation.
I encourage you to prioritize the importance of cash. Its availability is essential to not only avoid the possibility of bankruptcy, but also to take advantage of various expansion and growth opportunities.
If you are interested in improving your cash flow clarity, a good place to start is with a simple spreadsheet. A free template is available online through SCORE (partners with the U.S. Small Business Administration).