Ever wonder why a seemingly profitable business can suddenly face financial difficulties? The answer often lies in cash flow, the lifeblood of any company. While profit is certainly important, it’s cash flow that keeps the lights on and allows your business to thrive. It’s the financial pulse that keeps your company alive, but what exactly is cash flow, and why does it matter? Let’s dive into the basics.
Cash Flow 101
In simple terms, cash flow is the movement of money in and out of a business. Imagine your business as a bank account. Cash flow simply refers to the movement of money within that account. Inflows come from sales, investments, and loans, while outflows include expenses, taxes, and debt repayments. A healthy cash flow ensures you have enough “funds” to cover your ongoing expenses and stay afloat. But let’s break it down further:
- Cash Flow from Operations: This stream represents the cash generated from standard revenue-generating activities—like selling products or services. For instance, a car company’s cash flow from operations would come from selling cars.
- Cash Flow from Investment: This involves money set aside for interest-generating accounts or speculative projects. Investing cash flow is integral for business growth.
Cash Flow from Financing: Here, cash is generated from lines of credit or bank loans. In any given period, a business may pull in cash from all three sources while also spending money on various expenses.
Cash Flow Vs Profit
Cash flow and profit are related but distinct concepts. Profit (or net income) is the difference between revenue and expenses during an accounting period. Cash flow, on the other hand, considers changes in cash balances over time. Here’s the main difference between the two:
- Profit tells you how much money you’ve made after accounting for all expenses. It’s money on paper—what the business theoretically earns. While it’s a good indicator of overall financial health, it doesn’t tell the whole story.
- Cash flow, on the other hand, is about having enough money readily available to cover your bills, pay your employees, and invest in growth. Even a profitable business can struggle if cash flow is inconsistent or insufficient.
In short, profit tells you how much you’ve made, while cash flow tells you how much you have available.
Imagine a scenario where your business shows a healthy profit, but all your income is tied up in outstanding customer payments. This creates a cash flow bottleneck, leaving you unable to pay your own bills, even if you’re ultimately profitable.
Common Misconceptions About Cash Flow
Let’s take a look at some common myths surrounding cash flow that are pretty prevalent in the business world:
Myth: Cash flow is the same as profit.
- Reality: As we mentioned earlier, profit is the difference between your revenue and expenses, while cash flow is the actual movement of money.
Myth: Cash flow is only important for large companies.
- Reality: Every business, regardless of size, needs to manage its cash flow effectively. Even a small cash flow shortage can have a significant impact.
Myth: A positive bank balance means you have a healthy cash flow.
- Reality: A positive bank balance can be misleading. You might have upcoming expenses or outstanding invoices that haven’t been paid yet, impacting your actual cash flow.
Myth: More sales always mean better cash flow.
- Reality: While increased sales are generally positive, they can strain your cash flow if you’re offering extended credit terms or haven’t yet collected payments from customers. This can lead to a situation where you’re waiting on payments to cover current expenses.
Myth: You can’t improve your cash flow if your industry is seasonal.
- Reality: While seasonality can present challenges, there are strategies to improve cash flow, such as building a cash reserve during peak seasons, negotiating extended payment terms with suppliers, or offering discounts for early payments from customers.
OPTY’s Cash Flow Visualizer
By now, you probably grasp that understanding your cash flow is necessary to be able to make informed financial decisions for your business. To help you in this endeavour, we created the OPTY Cash Flow Visualizer, a free tool designed to help Alberta businesses gain control of their finances.
It provides a simple and user-friendly way to:
- Forecast your future cash flow needs.
- Identify potential shortfalls before they become problems.
- Make informed decisions about investments, staffing, and growth strategies.
By taking control of your cash flow, you can ensure your business is prepared for anything. To understand the financial health of your business, access your free Cash Flow Visualizer and visit OPTY today to learn more. Remember, cash flow isn’t just about surviving—it’s about thriving. Use the Cash Flow Visualizer to navigate Alberta’s financial landscape and ensure your business stays resilient and prosperous.
