It doesn’t matter whether you’re baking cupcakes or building jet engines, when it comes to business, cash is king. You need cash in hand to make payroll, stock inventory, buy or lease equipment, make repairs, pay your bills, and grow your company. That’s why cash flow is so important to a healthy business, and why cash flow problems are one of the biggest reasons that small businesses fail. Fortunately, a good grasp on cash flow basics can help your business stay ahead of the game, and make sure that you have the cash you need, when you need it!

So what exactly is cash flow?

Chances are you’ve heard the term thrown around, but you may not know just what it means. Simply put, cash flow is the measure of money as it travels into and out of your business, in the form of sales, purchases, payroll and other overhead costs, investments, etc. The operating cycle is the system of your business that the cash flows through, moving from the purchase of inventory to sales to collection of accounts receivable.

For most businesses, you begin with both cash and inventory. As you sell stock, you have to buy new inventory to replace it. When a customer pays for something with cash, then you’ve immediately got cash in hand again, that you can turn around and put into payroll, more inventory, or whatever else you need. But more and more often in today’s economy, customers don’t necessarily pay right away. They may pay with credit, or you may have to invoice them for products or services. In that case, instead of cash in hand, you have accounts receivable.

Accounts receivable are sales that you made, but it could be 30 days or even more before you actually see the money. This can be a problem if you need cash to, say, replace the inventory that you sold. The solution to running into money problems due to cash flow is to make sure that your net income and expenses result in a positive flow of cash, rather than a net drain on your accounts. Cash flow projections can help you to identify deficiencies in your cash flow before they become a problem, and also help you to invest any surplus cash wisely.

Ensuring a healthy cash flow means staying vigilant on collecting receivables, ensuring that your prices are regularly adjusted to account for any factors that affect cost, and understanding the balance between cash in hand and accounts receivable. After all, if you increase your sales but most sales are on credit, you might find yourself with a depleted inventory and no cash to replenish it. On the other hand, if you tighten credit requirements to generate more cash sales, you may find yourself losing out in overall revenue as fewer customers can buy your products or services.

Keeping a balanced budget and a healthy cash flow can be a tricky business, and it helps to have people in your corner who know the ins and outs of business financing. That’s where Virtual Bean Counters comes in!


Virtual Bean Counters serves business owners and entrepreneurs with remote web and cloud-based finance applications. Let our professional accountants run your daily, weekly, or monthly bookkeeping and accounting, so you can run your business. Contact us by phone at (913) 649-1040 or click here to visit our Contact page.