ELI5: What is Cash Flow?
Cash flow is the cash that goes in and out of a business.
Imagine your business like a big water tank. When you sell something, water (money) flows into the tank. When you buy something or pay bills, water flows out of the tank. Having enough water in the tank to cover what goes out is very important. If the tank runs dry, you have a problem.
Two Examples Where Small Businesses Struggle with Cash Flow
Sometimes, a company might sell a lot but customers don’t pay on time. Meanwhile, the company has to pay its bills. This can cause the water in the tank to go down fast, leading to a shortage. Note that water in the tank is a metaphor for cash in the bank account. If a company doesn’t receive revenue and make profit quick enough, it may not be able to meet its expense obligations.
A business may decide to start a big project. They buy lots of things but the money from the project will only come later. This can make the water in the tank run low and cause a struggle.
Consequences of the Lack of Cash Flow Management
When there isn’t enough water in the tank (money in the business), it can cause big problems.
A lack of cash is a big business problem. Employees might not get paid, and suppliers may stop delivering goods. If it goes on for too long, the business might have to close down.
How to Get Better at Managing Cash Flow
Managing cash flow is like keeping an eye on the water level in the tank. Here’s how to do it:
- Watch What Comes In and Goes Out. Be aware of when and the amount of money that is coming in and going out. What’s your marketing ad spend? How much do you need for payroll this month? Write it down. Do accounting and be aware of your daily and monthly cash inflows and outflows.
- Get Customers to Pay on Time. Ask customers to pay their bills quickly. Maybe even give them a little discount if they do. You can use accounting software like Xero SME accounting to help with sending automatic reminders.
- Have Some Extra Money Ready. Like with personal finance, it’s good to have a safety net. Keep some extra money in the bank, just in case. It’s like having extra water stored for a dry day or an unexpected cash flow issue.
- Plan Carefully. Before starting a big project, make sure there will be enough money to cover costs until money from the project comes in.
By following these steps, small businesses in Singapore can avoid the struggle with cash flow and keep their water tank (money) at a healthy level.
You may not have the financial expertise to set up a good cash flow system. If you need help, contact an accounting firm. Or register for an accounting software like Xero. Xero is super easy to learn yourself. It might take some effort, but it’s worth it to keep the business running smoothly.