What is Cash Flow?
Cash Flow is the movement of cash in your business. It is not your income and expenses; although it is related. The difference is that your profit and loss is a measure of money you made and the related expenses. Your cash flow projects when you will receive that money and pay for those expenses. It’s not uncommon to pay for your rent at the beginning of the month, pay your staff throughout the month and receive the money at the end of the following month. Your cash flow helps you manage that.
A business can be making a profit, and still run into cash flow problems.
Why is cash flow good?
The beginning of money
This is an interesting 5 part series explaining how money and the banking system began and developed. It is helpful in understanding the way money flows through our economy. This is not essential to understanding cash flow and I have included it here because, well, there are not a lot of cash flow videos and, being a cartoon, it is easy to watch.
Why is it so Hard?
Schools don’t teach about money and how to handle it. Our society has an interesting attitude towards money. We all say we want to be rich and yet we talk about “money is the root of all evil” and “filthy rich” and “money doesn’t buy happiness”. It’s as though we have a love – hate relationship with it.
Money is just a stand-in for value. Money is nothing more than a place holder for traded value. I give you this value and rather than give me something in return that you have, you give me money. Money is not as important as the things of value that we exchange like food, housing, etc.
Behavioural economist Dan Ariely talks about the ideas in his book: Predictably Irrational. We are irrational and yet, in very predictable ways. People have irrational responses about, among other things, money and value.
Tony Robbins is the guru about why we do what we do.
How to do it
Best Business Practices
But don’t go too far This is an anecdote about inappropriate cost cutting.
Cash Flow template
Robert Kiyosaki wrote the Rich Dad Poor Dad series. His message is pretty straightforward: work towards owning things that put money in your bank account, not take it out. These three videos make that point from 3 different view points. If you don’t watch anything else, watch these.
Asset / Liability
Good Debt vs Bad Debt
Business E S B I Cash Flow Quadrants
What will happen when you do?
Cash flow is the life blood of a business, it will be the difference between making it and not making it. But it is not the reason for business. This is an important skill every business owner should have so that they can forget about it and focus on building a business you can be passionate about. In the same way that an artist must understand pigments, brush strokes and balance before she can create works of art, business owners must have the essential skills before she can do the art of her business.
If you work just for money, you’ll never make it, but if you love what you’re doing and you always put the customer first, success will be yours. – Ray Kroc
Donald Trump talks about ups and downs, the passion and keeping at it. He has mastered cash flow so that he can focus on his passion: business.