What is Cash Flow Why Does it Matter


So, what is cash flow, and why does everyone think it is so important.

Well first I’m going to start out by saying I’m not an accountant, or banker, or investment analyst or anything close to any of those things.  And the explanation I’m going to give you is in the most basic of basic of terms.  Because that’s the way I wished someone had explained it to me when I started my business – so here goes…

Revenue is the money you make by selling something – a product or service.  Profit is, basically, what you have left over after you pay all your expenses.  But Cash Flow is a picture in time.  It tells you when you’ll get the money, and when you have to pay the expenses, and if one will happen sufficiently earlier than the other.

A Cash Flow Forecast is a report that takes a specific period of time – let’s say a month – and gives you a peek into how much money is coming into your doors, and how much is moving out in the form of expenses.  It’s the ‘flow’ of your cash – get it?

So for example, let’s say that you have 3 clients, and they each pay you $10,000 a month.  So your revenue for a month is $30,000.  And let’s also say you spend $20,000 a month on expenses.  So that means – and remember – this is a VERY basic layman’s description, so no comments from disgruntled business managers please.  That means your profit for the month is $10,000.

Now, what if client A pays on the 10th of the month, and clients B and C pay on the 30th of the month.  But you have to run a $10,000 payroll on the 10th and the 15th of each month.  Well, with the $10,000 from Client A on the 10th, and no additional money coming in until the 30th , you’re going to have trouble paying that 15th of the month payroll.  Because you don’t have enough money – yet.

And that is what a cash flow forecast can show you.  Because it’s tied to both money and even more importantly – time.  WHEN will you get the month, and WHEN do you have to pay money out.  And does the timing work out?  Because you see, without some sort of cash flow forecast, you might just think – well, I take in $30,000 every month, and my payroll is only $20,000 each month, so I’m golden – right.

Well, not so golden – because you can’t meet your expenses WHEN they’re due.  And what if, heaven forbid, client A is late with their payment.  You might even have trouble paying that payroll on the 10th .

So, your cash flow forecast can help you see things like – oh, I should hold on to some of the money from last month to cover my timing problem this month.  And I need to hang on to some of my money at the end of this month to cover my timing problem next month.

…Cash Flow is a picture in time.  It tells you when you’ll get the money, and when you have to pay the expenses, and if one will happen sufficiently earlier than the other.

A special call out here – some Cash Flow Forecasts break the sections down differently.  For instance, they may break out Rent and Utilities out into its own Expense Section.  Or put employee costs such as payroll and benefit costs under Operating Expenses, and then put the remaining operating expenses under something like Other Operating Expenses.

It’s really all up to you and your accountant.  And actually, I would say you matter the most in this equation, because if you can’t easily understand the Cash flow Forecast, and what it’s trying to tell you – they it’s not going to be of any value to you at all.  And after all – that is the point, isn’t it?

And then finally there’s the Summary Line – it shows you totals for the period.  So if you are doing a monthly Cash Flow Forecast, the Summary Line will show you a monthly total.

Your Cash Flow Statement can help you predict shortfalls, show you where you may come into a surplus, and give you vital information before it becomes a problem – like in our earlier example with the 3 clients.  In fact, if I were looking at that scenario, I think one of the first things I would do would be to change both the payment due dates for the clients, and the payroll date for the employees.  That would make the flow of cash a lot more comfortable, and help me ensure I am meeting my financial obligations.

Basically – you want to be sure you’re Cash Flow Positive.  Meaning you have more money coming in than going out.  And believe me – that’s a place you want to be.

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Mention that you have company rules and regulations and you expect them to abide by them.  And mention if you have any other documents you expect them to sign, like and Inventions or Confidentiality agreement.

Then comes the all important at will statement, and the sign off.

Now, I know many times people like to include information about things like vacation and other time off.  If you do want to add in the language, be sure you have disclaimers stating that the company can change those policies at any time – you don’t want to be locked into a vacation policy that no longer applies.

So see – a properly worded offer letter can provide all the employment confirmation you need to start your new employee.

Hold off on the employee agreement for your C suite level hires.

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And if you’re struggling with how to get your business off the ground, and what comes next, check out the Leader’s Journey Business Builder.  I designed this completely free video series to help you with figuring out who your customer is and where to find her, how to sell without selling, how to package and deliver your service and much more.

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