“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”

– Michael Dell, CEO of Dell Technologies

Most businesses plug along without giving real attention to cash flow. As Michael Dell eludes to in the quote above, cash is the gasoline to your business’s engine. You’ve likely heard about businesses that are “profitable” but somehow manage to go bankrupt? This is the classic tale of putting the pedal to the metal and letting it ride–all the while ignoring the low-fuel light that’s flashing from your dashboard–a strategy that generally doesn’t end well.

But there is a better way…

The key to NOT running out of “gas” is to first understand the concepts behind cash flow, then apply them to your own business. From there, you can take steps to increase cash flow. We’ll discuss a few of my favorites below.

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To help you with this, we’ve created an absolutely free cash flow projection template in the form of a simple spreadsheet. Once you’ve downloaded the spreadsheet, all you need to do is start plugging in your business’s expenses and earnings and voila! You’ve got visibility into the health of your cash flow.

Download the free cash flow forecast template

Now, on to the good stuff.

How to Understand Cash Flow

What is Cash Flow?

Cash flow is simply a measure of how much cash enters your business, weighed against how much cash leaves your business, over a fixed period (generally one month).

This is an intuitive way for most entrepreneurs and business owners to think about the flow of money since it’s exactly how we are taught to think about our personal funds in the “real” (corporate) world.

You get a paycheck–that’s money in. Your bank account goes up by your monthly salary every payday. Then you have regular expenses (mortgage, car loan, etc.)–that’s money out. Your bank account goes down on scheduled days for each of these expenses. Lastly you have irregular expenses–also money out. These are the things you didn’t necessarily plan on paying for but had to anyway. To calculate our cash flow, we take our ‘money in’ and subtract our ‘money out.’ What’s left is our flow of cash.

Cash Flow = Money In – Money Out

Since our ‘money in’ is positive and our ‘money out’ is effectively negative (we are subtracting it), we can have either a positive or negative cash flow:

  • If ‘money in’ is greater than ‘money out,’ our cash flow is positive.
  • If ‘money in’ is less than ‘money out,’ our cash flow is negative.
  • If the two are equal, our cash flow is ‘net zero.’

How is Cash Flow Different from a Cash Balance?

Your business’s cash balance is the amount of money that your business has access to at any moment in time. Over a period, you have an ‘opening cash balance’ and a ‘closing cash balance.’ Your cash flow for that period is the number that gets you from the opening to the closing. That is:

Opening Cash Balance + Cash Flow = Closing Cash Balance

So, if your cash flow is negative, your closing cash balance is lower than when it started. The opposite is true if your cash flow is positive. For example, if your business starts with $50,000 on the first of the month (opening cash balance) and has a cash flow of -$15,000 (note the negative sign), then your closing cash balance will be $35,000.

Since word problems that involve numbers are the bane of humankind’s existence, think of it in another way.

  • You start with an amount of money ($50K)
  • You have money come in and go out – more goes out. The net flow is negative ($-15K)
  • You end with an amount of money ($35K)

Do I Need Positive Cash Flow in My Business?

For a business, an occasional month of negative cash flow isn’t going to break you, so long as your cash balance remains positive.

A simplified definition for bankruptcy is a negative cash balance. At all costs, you must keep that number above “zero,” or the game has ended–you are out of lives. You can experience a negative cash flow, so long as the balance remains healthy. But, to grow a healthy business, you will absolutely need a robust, consistently positive cash flow.

What’s the Big Deal About Staying Cash Flow Positive?

How will you fund your business growth in the next year? Companies who receive angel investor or venture capitalist funding are exceptionally rare. Another (slightly more common) option might be a line of credit.

However, most entrepreneurs will use their own profits and reinvest in their growing businesses. If this is how you intend to grow your firm, positive cash flow has now switched from a ‘nice-to-have’ to a ‘must-have.’ You will require a growing positive cash flow to properly afford your growing expenses. I’ve never seen a business grow without strategically spending more money.

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All the while, the big Key Performance Indicators (KPIs) you should be looking at are your cash flow and cash balance. Ideally, you want your cash flow to be trending up (positive and growing), so that you have more money to reinvest in your business. On the other hand, you want to watch your cash balance to make sure that it never falls below your designated ‘danger zone’ (that area where things get uncomfortably close to zero). So, as you build up your cash balance, make sure that you are not “over-reinvesting” in your business–don’t start to fuel growth at the cost of your cash balance.

Why is it so Difficult for a Business to Achieve Consistent and Positive Cash Flow?

There are so many reasons that cash flow can be a thorn in your side and practically none of them have anything to do with the level or service you offer or your devotion to your customers. This is inherently frustrating because we would generally prefer for everything to be nice and tidy–the more we do for our customers, the more our business grows, right?

If only it were that easy…

Cash flow is impacted by some external factors, including:

  • Seasonality (retail does better near the holidays, a pool company does better in the spring and summer)
  • Macroeconomic trends (except for dive-bars, few businesses are ‘recession-proof’)

And, while you might not be able to influence the GDP of the nation, there are some steps you can take to enhance your cash flow.

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How to Increase Cash Flow: Offer Recurring Billing Options

As a finance nerd, there is nothing that gets me more amped than discussing recurring revenue–simply put, this is my go-to recommendation when I work with a business that struggles with cash flow. Recurring revenue is a deliberate business model where you sign your clients or customers up for a regularly billed service. What’s so great about it? The model allows your business to earn consistent revenue, even when seasonality and macroeconomic trends are against you.

Example 1: Retail

Scenario:

You own a retail store that sees improved sales in the 4th quarter of the year (the holidays). Your other months are slow and cash flow struggles.

Solution:

Offer a recurring option to your clients that includes a monthly product, shipped to their house, that is billed monthly (think Dollar Shave Club). You now have consistent revenue, even in those months that would otherwise be slower.

Example 2: Pool-service

Scenario:

You own a service-based pool business that has consistent revenue in the spring and summer months. However, the fall and winter months are difficult for obvious reasons–your customers are not in need of your typical services. During these months your cash flow suffers, making it hard for you to grow in the coming ‘busy’ season.

Solution:

Although your typical services are not in demand during the winter months, that doesn’t mean that recurring billing is necessarily off the table. What do your clients need in the winter? What types of winter maintenance packages could you offer that would help your customers to take proper care of their pools when they are not in use? If you’re in doubt about what your clients need, the best solution is always to ask them directly. You are likely leaving money on the table by not offering a solution to your customers that they will happily pay you to do!

Recurring billing options are not only exceptional solutions to solve your potential cash flow woes– they are also easier on your business from an operations point of view. This is where a software like PaySimple comes to your aid. Not only do you gain the added cash flow, but your operations get streamlined once you set your clients up on a set-it-and-forget-it payment plan. In short, if there are troubles processing a payment, you’ll hear about it. Otherwise, money is transferred to your bank, customers receive invoices, and all your financial concerns are handled automatically.

Regardless of whether you face cash flow woes or not, I urge you to consider how a recurring revenue model could impact your business. What does that look like for your company? How can you add value to your customers while simultaneously giving your business a boost in cash? Solving questions like these are the true ‘final frontiers’ for entrepreneurs–may you greet yours with an open mind and an abundance of passion.

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Gareth Pronovost

Gareth Pronovost

Gareth Pronovost is a finance expert, Excel wizard, and a certified business coach. He's worked with over 150 small business owners and loves turning those "boring accounting and finance numbers" into actionable insights. He can be found on YouTube working Excel magic in his vlog "Entrepreneurship by the Numbers."

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