Cash Flow (Where Has It Gone?)

So you are looking at the Profit and Loss Statement for your business and things seem to be going pretty well. You’re bringing in more than you are spending (or so it appears) so you should be rolling in money, right? Then you go to pay a vendor or make payroll, and your perspective changes.

What you thought was a surplus is now a shortage; you have to dip into savings (or expensive credit) just to pay suppliers or your employees. When the smoke finally clears, and you have time enough to breath and figure out what happened, one question remains on your lips: “Where in the heck did my cash flow go?”


What is Cash Flow?

To understand what is going on here, you first need to understand what cash flow is. Basically, cash is the amount of liquid assets you have on hand, and flow refers to the direction that cash is traveling. Cash flow, then, is the amount of cash or easily-converted assets moving in and out of your company. If you accumulate more cash than you are putting out, then you are said to have positive cash flow. If cash is moving out of your business, it is said to be negative cash flow. Ok a dump comment here but, it is good to have positive cash flow, while negative cash flow is something to be avoided.


How is Cash Flow Different from Profit?

So if you are pulling down a good profit, you should have great positive cash flow, right? Not necessarily. You could have lots of Net Profit and still not have positive cash flow. Why? Because positive cash flow and profit are not the same thing. You can incur a loss and still have plenty of cash on hand. Alternatively, you can post a profit and not have enough cash. Your position concerning available cash depends on the revenue coming in as well as the ability to quickly convert assets to cash. If you are a manufacturer moving a lot of profit, for example, your potential profit might depend on things like how fast your clients are paying you and how much inventory you are holding. Two areas that usually suck up cash are slow payers and increasing inventory on hand. Cash gets lost in the balance sheet.


What Causes Negative Cash Flow?

As you can see from the example above, many factors can cause negative cash flow. If you are making a profit but still are short on cash, it is important to track down exactly where your money is going. If you have had a record sales year, for example, but many accounts are not current, you might want to determine what is going on. If a sizable number of clients have not paid yet, you would need to determine why. Sometimes it is a matter of sending accounts to recovery agents, and sometimes some other problem might be holding up the process, so it is important to get to the bottom of things before determining your best course of action. This is around using the correct processes. Alternatively you may be increasing inventory on hand which it like getting you hard earned cash and sticking it on the selves rather than in the bank. A killer when you find overtime the extra stock doesn’t sell and becomes SLOB stock. It’s like putting a $1.00 on the selves, expecting to sell it for $2.00, and then it doesn’t sell and becomes old technology or fashion and then can only be sold at a bargain price of $0.50c. That’s another sleepless night.


Now You Know

Now that you know what cash flow is and why your cash may be flowing the wrong way, you can formulate strategies for turning things around. I know I have only highlighted a couple of cashflow areas  and there are many more, but once cash is flowing back into the business, it is a good idea to monitor cash flow regularly to make it continues to do so.