Everyone knows what cashflow means……, Right? Let us not split hairs, from my experience with providing financial consulting, I gather than only 1 in 10 people really know and understand cashflow.
I could be wrong, but after you have read this, you will see why I believe my estimation to be on the money.
Now, if you think you do not know cashflow or need a refresher, you have come to the right place.
What is Cash flow?
In its simplest form cashflow is the difference in timing of your money (cash) coming in and your cash going out. That is, it, but critical is the “Timing.” You might have heard stuff like cashflow is the profit you make, or the losses you make. Well, that is not cashflow at all. Let me give you an example:
On the 24th of April 2022, you receive a utility bill for $100 for March 2022 usage. You must pay the bill by 1st May 2022. You also expect to receive your salary of $2,000 for April on 30th April.
What is your cashflow on 24th April, and what will it be on 1st May 2022?
On 24th April you had zero cash in your hand or in the bank Cash = 0
On 24th April you owed $100 to the utility company Cash = 0
The timing difference between incoming and outgoing cash is zero Cashflow = 0
On 1st May you receive your salary in the bank of $2,000 Cash = $2,000
On 1st May you pay the utility bill of $100 online with you bank card Cash = ($100)
The timing difference between incoming and outgoing cash Cashflow =$1,900
Why is knowing cashflow so critical?
From the moment we start to transact with money we need to always have an idea of our daily money obligations. That means if we want to avoid issues, we must start from a basis of knowing the cash money we have now, and will have in the future. If you run a business without a handle on your cashflow your business will someday fail, for sure.
The main reason 90% of businesses fail is because the owner does not understand their cashflow on a day to day, weekly or monthly basis.
Written by: Jack Avon