Business

What Is Cash flow & Why Is It So Important?

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Imagine you have a nice car (your business) but run out of petrol (cash) on your way to fill up at the petrol station (success).

This is pretty much the perfect example of why cash flow is so important for a business.

Without cash your business can’t operate and without petrol your car can’t drive.

Cash flow is the amount of money that goes in and out of your business.

The aim is to have much more money coming in then going out, that’s how you build a successful business. It’s as simple as that:

  • If you have more money going out then coming in, you’re losing money.
  • If you have the same amount of money coming in and going out, you’re breaking even.
  • Finally, if you have more money coming in than going out, you are running a profitable business and should smile because you’re killing it!

How to Improve Your Cash Flow

You can improve your cash flow by being more efficient and reducing unnecessary costs, like having a fancy office.

Or you can improve your cash flow by making more profitable sales.

Not all sales are profitable, so make sure you calculate the amount of money you make on each sale. This is called your unit economics, a.k.a the economics of every sale you make.

Getting a bank loan or business credit card can temporarily improve your business cash flow.

But…understand that this is only a temporary solution, you’re eventually going to have to pay all that money back plus some extra icing on top, called interest.

If you end up taking out a loan or business credit card, the first thing you should do is take a day off and calculate your unit economics and dive deeper into your business finances.

What You Need to Understand When Taking Additional Business Finance

  • Why you needed the additional finance?
  • What in your business needs to change so you can pay it back & never have to borrow the money again.

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