It doesn't matter how great your business model. Your business won't survive without cash-flow.
In fact, one study found that more than 80% of businesses fail due to poor cash-flow management.
Getting good at managing cash-flow is one of the best things you can do for the life of your business.
Not only that, but the cash-flow framework is a skill that you can use in your personal life as well.
But cash-flow is not the same as profit. A profitable business can still be unable to pay its bills.
And, just because a business is meeting all of its obligations, doesn't mean that it's profitable.
Measuring profit is a way of analyzing a business. It's an accounting term that exists on paper.
Profit is calculated by subtracting your operating expenses and cost of goods sold from your revenue.
The problem with a Profit & Loss Statement is that it doesn't show the whole story of your business.
For instance, you may have an extra debt payment, equipment loan, tax payment or inventory costs.
If you're not even showing a profit on paper, you need to either increase revenue or decrease expenditures.
Ultimately, cash-flow comes down to timing and calculations - especially when you're just starting or expanding.
With a good system in place, you can predict shortfalls and have time to come up with a plan of action.
Truth is, most of "business anxiety" comes from worrying about cash-flow and not knowing what's going on.
When you understand cash-flow, you know exactly how much you can spend on fixed costs and even growth.
Remember, just because your P&L tells you there's extra money lying around, doesn't mean it will materialize.
Similarly, just because you have $10,000 in your business checking account, doesn't mean you can spend it.
Good cash-flow management gives you leverage and a good cash-flow system will help you do projections.
A cash-flow projection will tell you what is actually happening in your business, so that you can deal with it.
In general, most businesses will be able to project their cash-flow accurately for up to six months at a time.
A good rule of thumb, is that the farther you project into the future, the less accurate your projections will be.
One thing that can help with projections is to look at historical data because it takes into account annual cycles.
To help you forecast your future cash-flow, you can use a simple spreadsheet to track your cash account balances.
Your cash-flow spreadsheet will include our opening bank balance, cash-in, cash-out, and closing bank balance.
If your bank balances don't add up, figure out why because you either missed expenses or over-stated revenue.