Cash flow is one of the most important things you’ll need to consider when you’re running your own business. It’s also the main aspect that business owners struggle with from time to time. But what is it, how do you work it out and how do you solve a cash flow shortage?
What is cash flow?
Cash flow is the balance between the money coming in and the money coming out of your business over a certain period. Cash includes any existing money in the business as well as incomings and outgoings. However, cash flow doesn’t include assets or investments.
Why is it important?
Your business’s cash flow is like its pulse – it’s a great indication of the company’s financial health. If you have more money coming in than going out, you have a positive cash flow – but if you have more money going out than coming in, you have a negative cash flow.
A positive cash flow means you’ll have money available in the future to restock or invest in important outlays. But a negative cash flow means your business will soon run out of money, meaning you won’t be able to pay for the things you need.
Cash flow is by far the biggest challenge faced by small businesses. According to a survey of over 1,800 small businesses in the UK, Germany, France, Italy and the US, 54% said cash flow was their biggest obstacle to growth.
How do you calculate your cash flow?
To make it simple, let’s assume you run a florist and you want to work out your cashflow for April. In that month, you make £4,000 in sales. However, you also spend £2,500 on new stock and other expenses. At the beginning of the month, you had £3,000 in the business bank account. That means your cash flow for that month would be £4,500.
In simple terms, the calculation is:
(Cash + income) – expenses = cash flow
What’s a common cause of a cash flow problem?
Let’s say you win a big project, developing a piece of property or catering a large event. To finish the job, you’ll need to pay costs upfront but you won’t get paid until the work’s completed.
Or let’s say you’re an online retailer and you’re running low on stock. You need to buy more but you’ve already invested your money on an event you’re attending later in the year.
All of these scenarios would cause a cash flow shortage.
What can you do to boost your cash flow?
You can boost your business’s cash flow by reducing your expenditure, increasing your sales, or a combination of the two. However, if you want your business to keep growing, you probably won’t want to reduce your costs. And you’re unlikely to increase your sales without increasing your investment in marketing. As the saying goes, you have to spend money to make money.
In this situation, it’s worth looking around for short-term financing. There are a number of options including small business loans, merchant cash advances, invoice financing and even business credit cards. Each type of finance works in a different way and each comes with their pros and cons.