Cash Flow is King for any Startup Business!

Turnover is Vanity, Profit is Sanity and CASH FLOW is REALITY

This was a message that I grew up with. It was posted over my dads desk at his office. My dad is an accountant by training and a business owner by choice. He drummed into me from a young age that Cash Flow is King.

So what is Cash Flow? Cash flow is the timing of actual flow of cash into and out of your bank account. It is an art to balance the cash flow of a business. Lets break it down with an example. Lets say that you buy some stock from your local cash and carry. You pay before you walk out the door with your stock. This is a cash outflow. You take the stock back to your warehouse and the next day a customer places an order for the stock. This is the sale. You deliver the stock the next day and the sale is complete! But is it really complete.

The Sale is only complete when the money is in your bank. Lets say that you have credit terms with your customers of 30 days. That means that they will pay you after 30 days. 30 days later you give them a call and ask for them to pay and they tell you they put the cheque in the post yesterday. The cheque arrives a few days later and off you go to the bank to deposit the cheque. 7 days later the cheque is cleared into your account. Now if we ad that all up we can se the cash flows of this transaction.

Day 1 You buys some stock
Day 2 You receive an order
Day 3 you deliver
Day 33 You call to ask for Payment on your 30 day terms
Day 34 you receive a cheque
Day 41 The cheque clears into you account

Thats a total of 41 days after you paid for the goods that you got paid. So the cash has been out of your bank for 41 days. Lets look at this in a different scenario.

You receive an order from your customer and you immediately take payment for that order maybe its over the phone by credit card or online payment. The same day you place an order with your supplier and he delivers directly to your customer the next day. You have 30 days credit with your supplier and so you will only pay 30 days later. Because you want to have a good relationship with your supplier you make sure that the money is paid into his account 30 days later and because you have already been paid upfront then you have the cash available and you dont have to wait to pay him at all.

You can see through these two examples that they have different outcomes for cash flow but the same transaction took place. You will need to build a business model that fits with your cash requirements.

Its an art but you need to understand Cash Flow to ensure that your business survives