What is Cash Flow and Why Is It Important to Your Business?

Trying to run a successful business without understanding its cash flow can be like driving a car with no gauges or dashboard. You may know you're going somewhere, but you have no way of knowing if you'll get there — or how much it will cost you to do so. Here's a closer look at what cash flow is and why it's important to your business.

What is cash flow?

Cash flow is the amount of money that comes in and goes out of a business on an annual basis. Understanding your cash flow is crucial to the long-term health of your company. A healthy cash flow means you can pay your employees, taxes, and overhead without having to worry about when the next round of funding will come through. Meanwhile, a poor cash flow puts you at risk of missing payments or even going out of business altogether.

Cash flow and profit are not the same thing. Profit is reported on your income statement, while cash is reported on your balance sheet. Cash flow affects how much cash actually flows into and out of your business, while profit refers to the net income (total revenue minus all expenses) that's left over after accounting for all expenses.

What are the risks associated with poor cash flow management? 

Cash flow needs to be managed or else it can wreak havoc on your finances and your business. The following are some of the biggest risks associated with poor cash flow management:

1. You can’t pay your suppliers or employees on time.

2. You can’t buy materials or inventory in advance, so you wind up paying more for those things when you need them.

3. You have to borrow money from other sources (like a bank) to cover expenses when cash runs low.

4. You don’t have enough money to invest in growth opportunities, and you may have to lay off workers because you can’t sustain the kind of growth you need to stay competitive.

5. You have trouble meeting payroll and other bills, so you have to close down operations entirely and possibly file for bankruptcy protection.

How can I better manage my cash flow?

Trying to understand the numbers within your business can be overwhelming, but luckily there are tools to help make sense of it all. There are free tools like Quickbooks Online that make tracking daily receipts and expenses easy. But for a more complete view of your company's financial health, you might consider working with a professional like an accountant or bookkeeper who can provide valuable insight into where your company is spending money and where you should be spending more or less.

For help making sense of your business’s cash flow, contact C.CAMPBELL AGENCY today!