This is a portion of my manufacturing business that I learned the hard way. I was lucky that my business started profiting the first year of operations. However, depending on the growth of your business and your margins, your rate of growth is tied to the amount of cash flow you have in your business.
For me, rapid expansion meant tight cash flow. The more sales I made, the tighter money got. How did that make sense? I was so confused! It wasn’t until I learned the concept of cash flow, and what I now call, “The Art and Dance of Cash Flow” was I able to truly become a Serial Entrepreneur. Cash flow of a business is something I like to hammer home to everyone I coach in a product based business.
In fact, I am a bit obsessive considering I don’t have a MBA or any official business training. But from my own experience, when I coach and mentor, instead of pulling out all the business formulas, complex spreadsheets and ratios, I use a fairly down to earth way of explaining that one of the more powerful concepts in mastering your business and taking it to the next level is understanding cash flow.
“Cash is King” was a term that was thrown at me when I first started business. At the time, I had no idea what it truly meant. I thought, I am selling stuff, I am receiving cash, I have it… what’s the big deal. But it is a big deal, I am certain that many new business owners truly don’t think about cash flow until they don’t have it.
What is Cash Flow? Cashflow in the personal realm is your income minus your expenses. However, in the business realm it refers to the movement of cash into and out of your business and the timing of it in order to meet the demands of all the rotating pieces like being able to purchase raw products to make more products to then trigger more cash in hand. Woah…. Sounds like a mouthful! And well, it is… Watching how cash comes in and out of your business is one of the most pressing tasks for any business owner.
The outflow of cash can be cheques written each month to pay salaries, suppliers, and creditors. And the inflow of cash, is what you receive from customers and investors.
Positive Cash Flow.. the place where we all want to be! Positive cash flow is when a company’s inflow exceeds the outflow. Very simple!
Negative Cash Flow- Negative cash flow is when the opposite happens and the cash outflow exceeds the inflow. With a business there are many variables that can affect this even if you have calculated your margins and know that you should be “making money” from your products. This could be any reason from too much product that isn’t selling as quickly as other products. So the products on your shelf are still “cash on the shelves”, but if the products aren’t moving, you are unable to convert them into positive cash flow. Or another reason is that your accounts receivables (people that owe you money) take too long to pay you. So theoretically you have the cash coming in… but if it isn’t in yet or you haven’t sold it yet. The trouble comes when you need to buy more products (the kind that is selling!), you are at a stand still unless you have more cash to work with.
Growing Pains
For many entrepreneurs, cash flow or the lack of cash flow often goes hand in hand with low margins. The greater your margins, the more money you make, but more importantly, the more cash flow you have to grow your business and to bridge the growing pains of businesses trying to make it to the next level. Knowing the organic rate of growth (Your profits divided by the cost of making goods) is a very good way to see how much you can grow the following year if you plan to only invest back your profits.
Think about your cash flow. The Art and Dance of Cash Flow is mastering how to juggle money coming in and out and putting it into the right area at the right time to support the growth of your business. Make this an important part of your business planning before it becomes a negative reason of why you can’t grow in your business.
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With Love, Gratitude and Success,
Shauna Harper
The Serial Entrepreneur
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