I get a lot of questions about managing cash flow, so I want to write a bit about what cash flow is and isn’t, and how to distinguish between a cash flow problem and a (more serious) problem with profitability.
The terms cash flow and cash flow problem get thrown around a lot, but I find a lot of folks aren’t clear on exactly what they mean when they use the term. Cash flow problems are temporary moments of not having cash when you need it. These temporary problems usually have a clear cause, like a client unexpectedly pays late or you spill yesterday’s afternoon work coffee all over your Macbook and have to buy a new one. The cash flow problem should be a one payroll, or one month situation: temporary by definition.
If cash flow problems are ongoing, they’re not really cash flow problems, they’re symptoms of a profit problem.
A profit problem is when your business is not profitable enough on an ongoing basis, the business’s finances frequently feel tight, and you’re juggling money to make ends meet multiple months in a row.
Temporary cash flow issues are solved via drawing on the businesses’ savings account or a line of credit, both of which you use for short term coverage — say, a single payroll — and then pay back within a short period of time. When used this way, a savings account is sort of like a self-generated LOC in that you also want to be able to replenish it in short order.
If it’s actually a profitability problem, then managing cash flow won’t help you, because you need to fix the underlying profit problem. You can try to “manage” cash flow all you want, but if you’re not profitable enough there just won’t be enough cash to manage, period.
