Most business owners know the basics of how much money they have coming in and how much money is going out. But do you know the timelines between where cash is flowing in your business can have a huge impact on your success?
If you’re running your own business, understanding the cash flow cycle in your business can mean the difference between making it—and not being able to pay bills on time. Getting a handle on your cash flow cycle is one of the first steps you need to take to grow your business. But what exactly is the cash flow cycle and how does it work?
Cash flow is a common metric used in business to help determine the financial health and overall success of your business. But if you’re not an accountant (and I’m guessing you’re not), your eyes probably glaze over at the idea of thinking about your finances in your business.
Let me break down the cash flow cycle system in an easy to understand way so you can better see how it impacts your business and growth to achieve your goals. This is just one part of the essential financial information entrepreneurs have to know that I cover in my Not Rocket Finance small business finance course.
What Is Cash Flow?
What does cash flow mean in business? Simply put, cash flow is the money that is flowing in and out of your business at any given time. Money comes in, money goes out. That’s cash flow!
Cash flow can also be positive and negative—but cash flow has nothing to do with how profitable your company actually is. What’s good cash flow? Your business has enough cash on hand to pay bills when they come in. It’s that simple!
Keep in mind there are different strategies for using cash flow in your small business that have to do with positive and negative cash flow.
For instance, say you want to invest in a new computer for your business. You’ll need to build up some savings with positive cash flow, where you have more coming in than going out, to pay for that new computer.
On the other hand, negative cash flow means that you have more money going out of the business than you have coming in. While that may mean you don’t have enough money to cover bills, there are times when having negative cash flow makes sense, like if your company buys supplies to make a product before you sell it.
But to know whether or not your cash flow is the right strategy for your business’ growth goals, you first have to get a handle on what your company’s cash flow looks like and understand how cash flow works.
What Is The Cash Flow Cycle?
Now that you know what cash flow is in your business, it’s time to understand the cash flow cycle. It’s the key to understanding if your business is on the right track or if you’re going to run into cash flow problems.
The cash flow life cycle is the cycles of money in your business to get from product to money in your hand. Accountants call this the cash conversion cycle (CCC). Basically, this is the time it takes for you to turn whatever it is your business does into cold, hard cash.
For most online businesses trying to scale, a lot of the cash flow cycle doesn’t make a whole lot of sense because you probably don’t have a physical product you have to buy supplies to make.
A lot of accounting definitions of cash flow out there focus on buying supplies to make products to sell them. Instead, thinking about your investment of time and money into doing your work is your supplies you’d purchase in the cash flow cycle:
[image of cash flow cycle with scalespark branding, 4 points on cycle with example of services]
How long it takes you to go from work product to getting paid is the cash flow cycle for online businesses. And that’s the key to successful cash flow! Timing is everything in business, right?
You can use a cash flow statement to figure out how long it takes your business to turn what you do into cash. If you’re a launch-style business where you sell a course a few times a year, your cash flow cycle could be really long. On the other hand, if you’re a service based business that gets paid every month by clients, your cash flow cycle can be much shorter.
Getting a handle on your cash flow report can help you better anticipate operational expenses and avoid tricky situations with your small business finances, even if your business is profitable. A cash flow projection is another helpful tool to check on the financial health of your business in the future if you’re struggling with cash flow issues.
First Steps to Using Cash Flow in Your Business
As a business owner, part of your job is to manage your finances and make smart decisions that set you up for growth and success. Part of that is getting a handle on your cash flow cycle and using cash flow to get here you want your business to go.
The first step is getting a clear idea of what your cash flow looks like with a cash flow projection. This helps you understand when you’ll have money coming in, going out, and if timing between the two is right. As well, you’ll be able to identify if you’re having cash flow problems or if you need to improve your cash flow.
If you’re having issues paying bills on time and come up short routinely, fixing your cash flow problems should be your first priority before your business runs into serious trouble. Being able to pay bills, employees, and yourself on time is the first problem you should solve when getting a handle on your cash flow
Once you’ve solved those potentially business-ending problems, you can do more to improve your cash flow. There are a number of different strategies you can use based on your goals and where your business struggles the most. From getting your clients to pay faster to auditing your software to reduce expenses or even changing your pricing strategy, there are hundreds of ways you can start managing your small business cash flow better.
Not Sure Where to Start with Cash Flow?
A great place to start is with a small business financial health check to see where your business is struggling and get a clear picture on what needs to change in your business finances. I offer a free small business financial health check to get you started so be sure to sign up to see how you can improve your small business’ financial health.
Want to learn more about your business finances and finally understand what’s going on with your money? In my small business finance course, we cover the basics of small business finances and terms and reports you should know to better understand your business money, including cash flow. Learn about Not Rocket Finance to finally get a handle on your money!