Understanding Cash Flow
Cash flow measures the actual money moving in and out of your business. Positive cash flow means more money coming in than going out, essential for business survival. Calculate net cash flow by subtracting total outflows from inflows. Cash flow margin shows what percentage of revenue becomes actual cash.
Unlike profit, cash flow tracks actual cash movement. You can be profitable on paper but have negative cash flow if customers haven't paid yet or you've tied up cash in inventory. Healthy cash flow ensures you can pay bills, employees, and suppliers on time while investing in growth opportunities.
Monitor cash flow weekly or monthly to avoid shortfalls. Improve cash flow by accelerating collections, negotiating better payment terms with suppliers, managing inventory efficiently, and controlling expenses. Many profitable businesses fail due to cash flow problems - never confuse profit with available cash.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Profit is revenue minus expenses on paper. Cash flow is actual money received minus money paid out. You can be profitable but have negative cash flow if customers haven't paid or you bought inventory.
10-20% is generally healthy, but varies by industry. Higher is better - means you're converting revenue to cash efficiently. Low margins indicate collection issues or high cash expenses.
Invoice promptly and follow up on payments, offer early payment discounts, negotiate longer payment terms with suppliers, reduce inventory, cut unnecessary expenses, and consider financing options for large purchases.