What does that even mean? Cash Flow

There's really only one reason that businesses fail: Their cash flow sucks.

But Cash Flow is one of the most poorly understood numbers that business owners need to pay attention to.

One of the biggest reasons for that, I think, is that the reports that you get from your accountant or bookkeeper generally don't really *care* about cash flow. Your Balance Sheet tells you what you have and what you owe. Your Income Statement tells you how much your business' operations earned and how much they cost. But the change in your cash reserves isn't really represented on either of those.

So it's often the case that we think this: "If I make $1000 in profit, then my bank account should be $1000 bigger."

But there are tons of circumstances that make that assumption untrue.

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What kinds of things affect your Cash Flow differently from your Profit?

If you invoice a customer $200 for work you've done and they don't pay you for 30 days, that $200 will count as income but you won't get the cash for a month. When that customer actually pays you in the future, your cash flow goes up but not your sales.

Payroll for the last couple of days of the month is really an expense *on those days*, but you probably won't write paychecks until the next pay cycle, next month.

If you take out a loan, your cash goes up without corresponding income. Getting itself into debt isn't how your business makes money, so that transaction shouldn't show up on your Income Statement.

Similarly, if you take money out for yourself, your cash goes down without triggering a business expense.

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Why is this relevant?

Revenue is the immediate goal of your business. It's the most sustainable way to *generate* cash.

You could think of Profit as how *efficiently* your business earns that revenue.

Cash Flow is how much your available cash *actually changes* in a given period.

Revenue is critical - you can't keep the doors open without it in the long term.

Profit is more important, because spending $1.2MM to make $1MM in sales suggests your business will eventually consume itself.

Cash flow is how your business *lives and dies* - when you run out of cash, you can't pay yourself. You can't pay your vendors. You can't pay your team. But generating revenue isn't the only way to generate cash.

Now that you know how important it is that you think about Profit and Cash Flow differently, what are you doing to make sure that you understand all of these numbers? What are you doing to track and improve them all?