How much cash does your business have – right now?
Many business owners I know are almost obsessed by this question.
They check their bank balance on a daily basis, and believe this gives them a really good handle on their financial situation.
Today I’d like to explain why this is not only not true, but downright dangerous.
You see, the amount in your bank today can be very misleading. It tells you almost nothing.
Is that cash profit to be spent freely – or is it already committed elsewhere? Do you have payments that are going to come out of that account tomorrow or next week that will change your cash situation entirely? And if that money is spent, how long until it will be replenished with a new influx of cash?
Just because the money is there doesn’t mean that you’re doing well or that the money is yours to spend freely.
It could all be gone tomorrow if a big bill comes in, or payroll is due, or you have debt to settle…
So if you feel that you’re flush with cash when you glance at your bank balance, stop! The temptation to spend it is huge. But your cash situation can change radically from day to day.
So how can you tell what your cash position really is?
Here you need a change in mentality…
Instead of thinking about how much money you have in your account on any specific day, consider how money moves through your business over time…
You need to look at a much longer period and understand when money comes in, when it goes out, and how this ebbs and flows.
Cash is the lifeblood of your business. A good business will have cash constantly flowing through it in a regular stream. If it gets “stuck” – for example sitting in stock or with customers who won’t pay you – your business will stagnate. You won’t have the money you need at the right moments.
Think of that cash as the oil in your machine. If the oil is continually stopping and starting, your machine won’t function very smoothly, will it? It’ll splutter and choke.
It’s the same with cash. You need it to flow in a constant stream through the pipes – which is why we, quite literally, pay so much attention to ‘cash flow’.
Understanding this is key to making good financial decisions. In my next article, I’m going to talk more in depth about your cashflow, how to monitor it and – crucially – how to improve it if the money isn’t flowing fast enough. Watch out for those articles!
But in the meanwhile, if you need help understanding your cash position, please do get in touch. We work with businesses every day to help them better manage their cashflow. It’s an essential part of our outsourced financial management service, which you can learn more about here.
Simply email garry@insightassociates.co.uk or call our office on 01279 647 447 to book a no-obligation consultation with me, and to find out more.
Warmly,
Garry
PS. In the subject line of this email, I said that you shouldn’t check your bank account daily. Actually, that’s not quite true… We check our clients’ accounts daily!
But we’re not doing it because we want to see a huge bank balance. We’re doing it to make sure that the money we expected to go in is there, and that the money we expected to go out has gone.
We’re making sure that the money is flowing through the business as planned.
That’s the only reason to check daily. If those ups and downs in your account feel like an emotional rollercoaster, with highs when you look “rich” and lows when the money’s not there, don’t do it. Even more so if you’re tempted to spend that money when your balance looks large.
Remember: What your balance shows on any given day is irrelevant. It’s how that money flows over time that counts.
To discuss how we can help you get in control of the money in your business, please book a consultation with me today:
You might also like: Why Your Cashflow Forecast is Usually Wrong – Insight Associates Limited
