If you were able to do business in a perfect world, you'd probably like to have a cash inflow (a cash sale) occur every time you experience a cash outflow (pay an expense). But you know all too well that business takes place in the real world, and things just don't happen like that.
Instead, cash outflows and inflows occur at different times, and never actually occur together. More often than not, cash inflows lag behind your cash outflows, leaving your business short of money. Think of this money shortage as your cash flow gap. The cash flow gap represents an excessive outflow of cash that may not be covered by a cash inflow for weeks, months, or even years.
Managing your cash flow allows you to narrow or completely close your cash flow gap. It does this by examining the different items that affect the cash flow of your business. Examining your cash inflows and outflows, and looking at the different components that have a direct effect on your cash flow, allows you to answer the following questions:
- How much cash does my business have?
- How much cash does my business need to operate, and when is it needed?
- Where does my business get its cash, and spend its cash?
- How do my income and expenses affect the amount of cash I need to expand my business?
If you can answer these questions, you're managing your cash flow!
If you need any more convincing that cash flow management deserves your utmost attention, consider our case study illustrating what can happen if you have a cash flow gap.