Cash Flow Management 101

82% of small businesses (including startups) fail due to poor cash flow management

Cash flow is by far the most important management responsibility of a company.

But, what is cash flow? 

 Cash flow is the amount of money coming in minus the amount of money going out in a given period.

 
 Money coming in represents obligations from the company:

· Sales: obligations to clients in the form of products or services.

· Equity: obligations to investors in the form of returns or ownership in the company.

· Debt: obligations to financial institutions in the form of capital repayment and interest.

Money going out is based on obligations to the company:

Operating Expenses (OPEX): short-term obligations from employees (salaries), vendors (purchases of goods and services), and other third parties (like rent, utilities, and insurance).

Capital Expenditures (CAPEX): obligations from employees and/or third parties to provide/develop infrastructure and assets for the company that have a longer-term life (equipment, software, and R&D).

If a company has more money coming in than money going out, it is said to be cash flow positive. If the opposite is true, it is said to be cash flow negative. The sweet spot where money coming in equals money going out, is a cash flow neutral company. 

If a company is able to become cash flow neutral from sales only it is said to be self-sustaining or bootstrapped. 

A company can be cash flow positive over a 12-month period, but could be cash flow negative in one or more months in that period. That’s why it is important to look at cash on a monthly basis and even on a weekly basis to anticipate any cash shortages that might disrupt operations.

If your company needs support managing cash flow, please feel free to reach out to us at contact@summa.consulting