Cash flow is king

Without a positive cashflow, the business is dead

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What is the singular most important thing a business needs if it is to survive and then go on to scale up its activities? This question has challenged business thinkers and entrepreneurs for a very long time. Some say marketing, some say a great product. Others still say the right timing, but the reality is that, even more important than all those, is positive cashflow.

Cash flow is a simple concept: money in and money out, and it can be tracked from your bank account. Positive cash flow means that more money has already arrived than is needed to pay the bills that are immediately due. The key thing here is that the ‘money has already arrived’ – not promised, not owing, but is already in the bank account. In general, when a business starts, there is period of negative cash flow during which it has to pay its bills before generating income, and it has to do this from the initial start-up funds. The scale of the funding required is determined by the maximum outflow of funds before the inflow of income exceeds the outflow of expenses. This means that an ultra-realistic view has to be taken on the generation of income in terms of amount and timing.

Vanherck_CashflowAnd here’s the most important point: scaling up a business means that more money is required to fund the cash flow and so, if the decision is made to scale up, then the entrepreneur needs to ensure that a new tranche of funding is available. And that means calculating a new cash flow.

“A business does not have to make profit,” says Jan Vanherck, a well-known Belgian businessman and Dean of United International Business Schools, a private business school network with campuses in Belgium, Spain and Switzerland. “But it has to have a positive cash flow if it is to survive. If you can’t pay your bills, then you’re bankrupt.” Vanherck is of the opinion that entrepreneurs need to firmly differentiate between profit and loss, an accountancy concept, and cash flow, which is the lifeblood of the business.

Vanherck, who acts as a consultant and mentor to a wide range of entrepreneurs, observes that those startups that are not going to survive share a common fault: they focus solely on the product and the excitement of the business, and ignore the cash flow until it is too late. “Entrepreneurs often do not understand the concept of cashflow and they have nobody around to tell them about it. Cash flow is so simple to monitor and is not difficult to calculate, providing a realistic income model is used. And cash flow needs to be calculated on a rolling three-to-five-year basis.”

Although calculating and monitoring cash flow is one of the least exciting things about running a business, it is critical for success.

For more information on cash flow, see:

Entrepreneur Encyclopaedia

Understanding Cash Flow Analysis

Additionally, a discussion with your accountancy or financial advisor would be a good idea.

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