Cash flow is king. Today you’ll learn you can maximize your cash flow. If you think your business has a cash flow problem, reach out to a professional before it’s too late.
Cash flow is an increase or decrease in the amount
of money a business or individual has.
Cash flow is a lot like water. We need it to survive, in fact, up to 60% of us is water. Cash flow can go in or out of your accounts, but to be healthy, we want it flowing in.
Think of your checking account as the perfect example. Cash flows into your account, expenses get paid, and money comes out of your account. What happens if you don’t have any money in your bank?
You’ll have a negative cash flow. If you have overdraft protection, you won’t incur any fees.
Sometimes it happens. You go out to dinner or buy something off of Amazon. Then you pay your bills, leaving you with a positive balance. Shortly later your account gets charged, and the $104.99 you spent, sent you into negative cash flow.
On the other hand, if you win a small sum of money, you have added positive cash flow to your account. This article will help you understand how to manipulate cash flow in your favor.
Cash flow quadrant
The cash flow quadrant was first introduced by Robert Kiyosaki to separate and define the different types of careers out there. It’s broken down into four quadrants: Employee, Self Employed, Business Owner, and Investor. Here’s the cash flow quadrant.
The left side of the cash flow quadrant
The left side of the cash flow quadrant
pays the most in taxes and exchange time for money.
Employee: The most important thing for employees is security. Employees often avoid risk. Education is more about finding the skills needed to get a great job than it is about managing money. Employees don’t usually think about cash flow but instead focus on earning a higher wage.
Self-Employed: Being self-employed brings with it risk ,and the people that fall into this part of the cash flow quadrant don’t mind risk. The most important thing for self-employed people is control. As a result, they are less likely to delegate tasks and will only make money when they work.
The right side of the cash flow quadrant
The right side of the cash flow quadrant pay the least in taxes and create or invest in assets that produce positive cash flow. Earn money while you sleep.
Business Owner: Business owners don’t own a job; they hold a system or product. Business owners hire people who have the skills needed for their business and who have more talent than them. Business owners can to create more money when they create a new product or system that produces value.
Investor: Investors have the most financial education in the cash flow quadrant. Investors often use other people’s money to attain assets, then use the income from those assets to produce more assets. The richest people in the world are investors. Investors look for opportunities to engineer cash flow to create more assets.
Which of the quadrants are you?
Four tips for positive cash flow
- Know when your bills are due. If it’s not a surprise, you’ll position your money accordingly. A budget every month will help you forecast and plan for your bills.
- Don’t spend money you don’t have. Overspending is easy when society encourages credit or debt. Be careful about spending money you haven’t earned, it’s one of the quickest ways for you to get into a debt trap.
- Prepare for emergencies. Most financial coaches suggest an emergency fund as a safety net. A safety net will keep your cash flow positive when the unexpected happens.
- Dissect your bank statements to find any money leaks. Money leaks include any subscriptions or membership you’re paying for but no longer use.
Cash flow and business
If you don’t have a positive cash flow, your business will fail. We dive deeper into how you can avoid the closure of your company in this article.
82% of businesses fail because of cash flow problems.
It’s critical as a business owner
to understand cash flow management.
Cash flow starts with understanding your monthly breakeven. Your monthly breakeven is how much money you’ll need to bring in to cover all operating expenses to include payroll. If you’re unsure of this number, reach out us so that one of our accountants can help you. If you don’t know how much money your business needs to operate you won’t have a target to hit.
The easiest way for you to avoid cash flow problems is to project for cash flow. If you have timely and accurate financial reporting, you’ll have time to adapt to any issues. You need to pay your employees and suppliers, but the money you receive is from your customers. If there is a drop in regular sales, it affects your cash flow.
Profit and cash flow
There is a significant difference between profit and cash flow. Profit doesn’t equal cash flow. Without a positive cash flow, your business will be unable to profit.
It’s possible for you to make a profit and still have a negative cash flow. It’s possible for your business not to profit and yet have a positive cash flow.
Having negative cash flow won’t mean your business will fail but a pattern of negative cash flow can. Although your business may be profiting from sales, if you can’t pay your rent or employees, you risk losing your business.
Six ways to help your business manage your cash flow
A cash flow statement will give you oversight as the owner. It can be an extremely valuable tool for your business. If you aren’t creating one contact us to get you started, these tips will help you with free cash flow.
First, build an emergency fund.
If your business has a cushion, you’ll have more control as an owner to steer through cash flow problems. You should have enough cash on hand to cover necessary operating expenses like rent and payroll. If you build an emergency fund, your business will remain positive cash flow regardless of the profit.
Second, your businesses account receivable management.
When running a business, there are questions you need to answer.
How will you collect money payments from your customers?
What accounting processes will you have
in place to ensure you get paid timely?
Account receivable management is essential. One example is a business that manages it poorly. If you allow your customers to pay at a later date, what does it do to their cash flow?
If your customers don’t pay you, you can’t afford more inventory, and so on. Our accountants can help you build a system that keeps your business operating.
Third, account payable management.
Another aspect to consider is how you will pay your vendors? If you don’t have vendors because you run a service business, how will you pay your employees?
Account payable management is just as important as account receivables.
If your business doesn’t have a system to track your account payables, our accountants can assist you. If you know when a bill is due and the amount, it is more likely that you’ll have the cash flow to support it.
Fourth, delegate and plan for travel.
All good leaders know how to delegate, and just because you’re traveling doesn’t mean your business stops operations. Plan and delegate any day to day business activities, so they are completed timely and not neglected.
If one domino falls, the others will shortly follow.
Fifth, create another source of income.
Just as we learned in the cash flow quadrant, business owners are experts at creating a product or service. Consider a vertical integration where you supply as much of a product or service that you can.
Sixth, avoid unnecessary expenses.
Unnecessary expenses are bank fees due to a low balance. Late fees incurred from supplies. The knowledge you don’t know. In how to avoid the closure of your business, I cover “Be honest with what you know.” It’s what we don’t know that usually ends up becoming an expense.
Staying cash flow positive requires
oversight on multiple business activities.
Three ways to help your business build positive cash flow
Building cash flow is just as important as managing it. It’s beneficial to have an account that can explain your numbers while you focus on doing what you set out to do, build your business. These are four ways you can build positive cash flow for your business.
Proper inventory management will build positive cash flow and prevent negative cash flow.
So many dollars are wasted due to an improperly stocked inventory. Inventory is another aspect of your business and goods equal money. If it doesn’t make you money it’s a liability. Often times an owner can return thousands of dollars (depending on the industry) just by returning items that were purchased but no longer needed. Your spending money on inventory you already have instead of spending money on what the customer is buying.
Find new problems.
Success is a paradox because it always brings with it the symptom of new problems. By helping your owners achieve success you’re helping them create new problems. You can be the one to solve these problems. Someone will solve it eventually, it might as well be you. This is how you build repeat customers, and they’re already willing to work with you.
Creating passive income creates cash flow.
If you are the proud owner of a Subway franchise, consider teaching a class on how to build a successful subway franchise. By creating a course, or likewise a program you are investing in potential passive income.
The franchise model for cash flow
The franchising model is a great way to build positive cash flow as a business.
McDonald’s Corporation is an excellent example of franchising. Ray Kroc first partnered with the McDonald’s brothers as their franchising agent. If you’ve seen the movie on Netflix (great adaptation I think) you already know what happened.
Ray Kroc bought the land McDonald’s operated on, and today McDonald’s runs mostly off that model. McDonald’s buys the land and leases it out franchisee’s instead of charging them ridiculous royalties, the startup costs today are close to $1.2 million.
It’s estimated only 15% of McDonald’s are owned and operated by the corporation directly, the majority are franchisee-owned. McDonald’s pays no expenses and pockets 100% of the cash flow earned.
Although McDonald’s as a business will fluctuate. Rent has to be paid and the land provides steady income with possibility for development.
Cash flow statement
A cash flow statement shows the cash and assets entering and exiting a company’s financial records.
Cash flow statements are broken into three sections: Cash from operating activities, cash from investing activities, and cash from financing activities.
Operating activities are the cash flow producing activities of the business. These are usually associated with sales, purchases, and expenses.
Investing activities are the acquisition and disposal of investments not included in cash equivalents. Investing cash flows are usually associated with buying or selling.
Financing activities include cash flow linked with loans, and the interest incurred. Dividends are considered financing cash flow.
Cash flow statement methods
There are two different methods used to produce a cash flow statement. The cash flow direct method and the cash flow indirect method.
The cash flow direct method accounts for individual purchases or cash received or that has been paid out, the total is the cash flow.
The cash flow indirect method accounts for net income instead of the individual cash flow instances. The indirect cash flow method accounts for depreciation of assets and is commonly used.
Your cash flow equation
Finding your cash flow equation starts with two essential things that everyone can apply.
The first is where do you want your cash flow to be?
How much cash flow will you build? Be as specific as possible.
The second is what is your cash flow today?
How much cash flow do we have? Be as honest as possible.
You determine the missing variable. Only you can complete the work in your cash flow equation, but a coach can help you if you find it difficult. Our cash flow analysts can visually walk you through your cash flow breakdown.
What are some creative ways that you’ve created cash flow?
Summary for cash flow
Cash flow affects all of us from the individual to the large corporation. The local business and the self-employed. The amount of money that passes through our hands has little impact, compared to how we handle that money.
By understanding cash flow mechanics, you can engineer positive cash flow. Cash flow sets the foundation for financial freedom. If you have cash flow questions, post them in the comments. Our financial architects can help you with your cash flow blueprint.
Cash flow is where financial independence starts. I hope this article has helped explain the importance of cash flow. A cash flow statement can be a powerful tool that drives businesses success. Discover the benefits of a profit and loss report in our article here.
“Every decade or so, dark clouds will fill the economic skies,
and they will briefly rain gold. When downpours of that sort occur,
it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”
-Warren Buffets 2016 Berkshire Hathaway Annual Letter
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