Cash flow is the dopamine of any successful business.
Building a sustainable business means keeping the end in mind: Will you be able to sell this business in 10 years? Is this business buying you time and freedom? One of the first and most crucial steps to ensuring a long prosperous lifespan for your business is understanding cash flow.
Why is this component so important and why should you care about it so much?
Let’s break down the 3 key reasons:
1. TIME & FREEDOM
Cash flow plays a critical role for any commercially profitable enterprise to run effectively and efficiently without the owner. The main reason many choose to own their own business instead of pursuing a corporate job is to buy themselves time and freedom to do what they are called to do. Having a strong cash flow component in your business is the key driving force to achieving this freedom – it means that your business can successfully run without you as the owner being present every moment.
2. FUTURE FOCUS
If you plan to build a business that you can eventually sell at its maximum value, it is imperative to have clarity on the exit strategy and the role that cash flow will play.
A few years ago, my partner and I developed what we called “The Saleability Model” to help business owners understand the concept of “starting with the end in mind”. We would ask them, “If you were to invest in a business, what would be the first component you would look at?”. The key recurring response was to consider whether the business can drive strong and consistent cash flow or not. In order to obtain maximum capital gain upon selling the business, you need to focus on building a business that delivers strong and consistent cash flow as well as building a business that is scalable for the next owner. Investors interested in buying your business will look at:
- The business’s ability to generate cash flow
- What assets are they acquiring
- The quality of the people, processes and systems in the business
- The business’s scalability post-acquisition.
Whilst these components are very important, it is crucial to understand that businesses do not go out of business because of a lack of profit, rather, they go out of business because they lack consistent cash flow.
3. GROWTH
Cash flow is essential to a business’s potential to scale and grow. With strong and consistent cash flow, a business is able to prioritise and drive growth by investing in the people, assets, systems, marketing and technology needed to scale up. When investing in these key operational assets becomes possible (due to a strong cash flow component), we are able to experience the freedom and time that comes with building a sustainable business. On the other hand, a lack of cash flow often results in limited business growth and performance.
Start understanding your business’s cash flow component by asking yourself 3 vital questions:
- Where is our cash going?
- What consumes most cash?
- How do we manage our cash flow on a daily, weekly or even a monthly basis?
Answering these questions requires pinpointing where all your cash flow is tied up and how to prep for your next business growth chapter. For example, it is counter-productive to have a large portion of your revenue still with your debtors, you need to shorten that cash flow cycle and the time it takes clients to pay from when client work is completed.
In closing:
When you manage your cash flow, know where your cash is going, and what it is doing for the business, the sky is the limit. Cash flow management shows that you are taking the intentional steps towards securing a future where your business successfully runs without you. So do the work and track the cash to make your money work for you.
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