I am sure that most every reader of this site has heard the term “cash flow” at some point or another. Cash flow can turn into a serious problem for a business owner, big or small. Do you know what cash flow is? Do you understand why it can be a problem?
The truth is, unless you have owned your own business, it is likely that you don’t really understand cash flow or why it can create a problem. I do not say that as a slight or an insult to my readers, not at all. I say it, because that is what I believe, and one of the main reasons I believe that is because I know that before I got into business for myself, I did not have a good understanding of what cash flow really was all about.
You can be broke even if you are making big money!
It’s true, in fact, the more money you earn, the more broke you can be, if you have a cash flow problem.
All of my businesses are online businesses, stuff on the Internet. Given the fact that, as a rule, my customers and I never meet face to face to do a transaction, in nearly 100% of cases, the transaction is completed through a credit or debit card, where the customer can pay online. From time to time, people will pay me via Western Union, or even more rarely, I will make a face-to-face sale, but it is very rare. I would say that at least 99% of the money I earn comes through a credit or debit card transaction. Nothing wrong with that. But, generally, it can take up to about a week for the money to actually be in my hands.
Note: Yes, I know that there are credit card processing companies where I would have the money within 24 hours or even less, but those fast type of transactions are not available to me, because I live in the Philippines, and such companies are almost all in the USA and do not provide accounts for people living in other countries.
So, let’s say that I am normally doing $5,000 per week worth of credit card transactions. I get the money from my payment processor on Fridays. So, every Friday I am flush with cash because I just got paid for all of the sales I made over the past week. Let’s say that on Friday I get $5,000 from my previous week’s business. OK, that is my money to last me through the next 7 days, until the following Friday. But, if I do $20,000 worth of business during that week, the $5,000 that I got on Friday may not last too long. I mean, it will cost me money to do all of that extra business. What happens if I run out of money on Monday or Tuesday? Well, that means that I will have to either dig into my savings to fund business and my personal life for 4 or 5 days, or I will have to live a few money-less days. Neither is a good thing, but on Friday, I am going to have a nice wad of money coming!
That, my friends, is a cash flow problem.
On the other hand, if I have been earning $5,000 steadily, week after week for many years, and then I have that $20,000 week, and over the next few weeks, I continue to have such phenomenal weeks, well, that shows that something has happened that has ratcheted up the business to a whole new level. I might have some pretty severe cash flow problems for the first couple of weeks, while I adjust to having a whole new level of business, but after making the adjustment, my cash flow should loosen up again. Loosen up until that next burst in business creates a whole new cash flow problem.
So, if you look at it closely, while having a cash flow problem is tough and can be downright miserable for a business owner, in the end it can be a good thing to have, because it might mean that your business is growing at a nice pace, and the cash flow situation could dry up shortly.
On the other hand… if you have been having $5,000 weeks, and you suddenly start having $1,000 weeks.. well, that first week, you will be flush with cash, but as time passes, you will enter cash flow problems again. This time it is not a good thing, though, because instead of a situation where you are using all of your money to support new business, this time you are actually using all of your cash to keep yourself going because you have hit a dry spell for business. If that dry spell keeps going, after a while you will find yourself in serious trouble and have to decide if you can sustain the business at all.
So, cash flow problems, while not fun at all, can be a good thing or a bad thing. One thing is for sure, though, if you are in business for yourself, you will have cash flow problems. If you learn how to control them and deal with them, you will be a success.