Here’s Why Cash Flow is the Real Lifeline
As a business owner, it’s easy to get caught up in profits—after all, it’s the number that shows whether your company is successful, right? Not quite. While profits are important, they don’t tell the full story of your business’s financial health. In fact, cash flow is often a better indicator of whether your business can keep its doors open.
Let’s break down why cash flow—the money moving in and out of your business—matters even more than profits when it comes to paying the bills.
1. The Profit Trap: Why Profits Alone Aren’t Enough
You might be thinking, “If I’m making a profit, my business is doing fine.” However, businesses often fail even when they’re profitable on paper. This happens because profits don’t account for timing—you can show a profit but still not have cash available to meet your immediate expenses like rent, salaries, or vendor payments.
Example: A business could generate a profit of $50,000 over a quarter but still run into trouble if $60,000 in bills are due in the same period and customers are slow to pay their invoices.
2. Cash Flow: The Lifeblood of Your Business
Cash flow is the actual movement of money in and out of your business. Positive cash flow means more money is coming in than going out, and negative cash flow means the opposite. The truth is, you need cash flow to cover day-to-day expenses, like paying your suppliers, staff, and utility bills. Without enough cash on hand, even the most profitable business can run into trouble.
Statistic: Studies show that 82% of small businesses fail due to poor cash flow management. This proves how critical managing cash flow is for long-term success.
3. The Timing Problem: Cash Flow vs. Profits
A common issue is the timing difference between cash inflows and outflows. For example, you may sell a product in January but not get paid until March. Meanwhile, your bills are due every month. This timing gap between when you make money and when you receive it can create serious cash flow challenges.
Solution: Implementing better cash flow management techniques, like incentivizing early payments from customers or negotiating better payment terms with suppliers, can help bridge these gaps.
4. How to Improve Your Cash Flow
Managing cash flow effectively doesn’t have to be complicated. Here are a few actionable strategies:
- Invoice Quickly: The sooner you send out invoices, the sooner you get paid. Consider automating your invoicing process.
- Negotiate Payment Terms: Try to delay outgoing payments and speed up incoming payments by negotiating with suppliers and customers.
- Build a Cash Reserve: Having an emergency fund or line of credit can help you cover unexpected shortfalls in cash flow.
Pro Tip: Regularly reviewing a cash flow statement—which shows your inflows and outflows—can help you understand where your money is going and where improvements can be made.
5. Cash Flow vs. Profits: A Balanced Approach
While cash flow is essential for keeping your business running day-to-day, profits are still important for long-term growth. The key is to balance both. Profits ensure you’re on a path to growth, while cash flow guarantees you have the liquidity to stay in business.
Conclusion: You can’t pay your bills with profits alone—cash flow is what keeps your business running smoothly. By focusing on both cash flow and profitability, you’ll not only survive but also thrive in the long run.
Ready to improve your cash flow and boost profitability? Book a consultation with our profit mentorship and cashflow advisory team today, and let us help you take control of your business finances.
Book your consultation call today
CA Harbinder Singh | CFO Advisor & Profit Mentor
TRAY Management & Accounting Inc.
M:+1 604 722 2651
www.traymanagement.ca
