Managing Cash Flow and Working Effectively with Banks: Part 1

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This is an excerpt from a presentation I give to business owners about managing cash flow and working effectively with banks.

In this first part, we’ll talk about what cash flow is and why it’s important.

What is Cash Flow?

The best, and simplest, way to think about cash is:

Money in minus money out

Of course, it’s a little more complicated than that, but that’s a good way of visualizing what’s being talked about when people use the term “cash flow.”

Why is Cash Flow Important

It’s important to know about cash flow for two reasons:

  1. Obviously if you run out of cash, your business will fail
  2. Even a profitable business can run out of cash if it doesn’t manage cash flow

Where to Begin?

The first step in managing cash flow is to have accurate records. No matter how annoying you might think bookkeeping is, having accurate records is the foundation on which all of your management decisions — cash flow and otherwise — are built on.

What is a good recordkeeping system? I define it this way:

A good recordkeeping system will help you quickly and easily tally up your business income and expenses.

How Do You Use Recordkeeping Systems to Manage Cash Flow?

There’s a few things you can do with your recordkeeping system to help manage cash flow:

  1. Look at your costs to determine how much you’re spending
  2. Determine the timing of when expenses seem to come out, and when revenue seems to come in
  3. Know the break-even point of the products or services you sell. For more about breakeven calculations, check out this post from 2015.

In Part 2, we’ll go into budgeting and how it can help manage cash flow.