You’re standing at the edge of a towering mountain. It’s called the ‘Cash Flow Peak’, and reaching its pinnacle is the dream of every business owner. But how do you climb this financial Everest? How much cash flow per month is good for your business?

The Heartbeat of Your Business: Understanding Cash Flow

Think of cash flow as your business’s heartbeat. It’s the steady rhythm that keeps your venture alive and thriving. It’s the lifeblood that fuels growth, propels innovation, and drives success. So, what is cash flow?

Simply put, cash flow is the money that flows into and out of your business. It’s the income you earn from sales, minus the expenses you pay to operate.

Your Business’s Lifeline: How Much Cash Flow is Good?

How Much Cash Flow is Good, is actually a poor question. The better question to ask is how much cash is the company keeping after all monies have flowed out? The point of cash flow is to measure and compare your inflow and outflow of cash within a company. Inflow should always be higher than outflow for a healthy company. Break-even or negative cash flow is a sign of unhealthiness.

Some Practicals

Cash Flow should be measured and looked at per month, per quarter, and per fiscal year at minimum. Honestly speaking you should be looking at your numbers consistently throughout each month to help get a pulse on the company.

Also, a good ratio for cash flow is more than 1.0. It demonstrates that your company is well-equipped to meet its debt obligations without needing to take on additional liabilities. This ratio is calculated by dividing the operating cash flow by the present liabilities.

The Magic Number: A Good Cash Flow Percentage

What is a good cash flow percentage? While there’s no definitive number, many finance experts recommend aiming for a cash flow margin of 10-20%. This means that after paying all your bills, you still have 10-20% of your revenue left over. It is important that your cash inflow should be higher than outflow.

In my experience, something to keep in mind, is that not all monies are the same.

For Example: You offer Service A where you only make $0.20 on the dollar vs. Service B where you make $0.80 on the dollar. Which money is better? Money from Service B. You get to keep more and thus it increases positive cashflow. Having a P&L for products, services, and offerings is super informative.

Your Cash Flow percentage is a great metric but understanding the “why” behind the metric is much better in my opinion.

Your Financial Fortitude: Cash Reserves

How much cash should a company have on its balance sheet? How much money should a small business have in the bank? Again, it depends. However, a common cash reserve formula suggests having three to six months’ worth of operating expenses saved up.

Personally, we have a year saved up. I think it is worth knowing that there is a safety net to take care of your team and their families if worse-case scenario happens.

If you should do it for your personal finances, you should do it for your company finances as well.

Items That Impact Cash Flow

Several factors significantly impact the cash flow in a business. Primarily, these include revenue, expenses, credit terms, and inventory management.

1. Revenue: The main source of cash inflow for any business. Boosting sales, increasing prices, or exploring new revenue streams can enhance cash flow.
2. Expenses: The primary source of cash outflow. Reducing unnecessary expenses, negotiating with suppliers for better deals, or delaying expenditures can improve cash flow.
3. Credit Terms: The terms you set for your customers can significantly impact your cash flow. Tightening credit terms or offering incentives for early payment can ensure cash comes in quicker.
4. Inventory Management: Effective inventory management ensures you’re not tying up too much cash in unsold goods. Regularly reviewing stock levels and implementing a just-in-time strategy can help to free up cash.

Practical steps to improve cash flow include preparing and regularly reviewing cash flow forecasts, promptly sending out invoices and actively chasing up overdue payments, considering different financing options (like loans or lines of credit), and optimizing your inventory levels. Remember, managing cash flow effectively is crucial for the survival and growth of your business.

How To Calculate Cash Flow

Calculating cash flow in a business is a fundamental part of financial management. The basic formula for calculating cash flow is: Cash Flow = Cash from Operating Activities +(-) Cash from Investing Activities + Cash from Financing Activities.

Let’s break it down with a practical example. Suppose your business has the following figures:

1. Cash from operating activities (like sales, providing services): $50,000
2. Cash used for investing activities (like purchasing equipment): $10,000
3. Cash from financing activities (like loans or investor capital): $20,000

Using the formula, your cash flow would be calculated as follows: Cash Flow = $50,000 – $10,000 + $20,000, which equals $60,000. This means your business has a positive cash flow of $60,000. Remember, a positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges.

Your Cash Flow Statement

Your cash flow statement is the financial report card that shows how well you’re managing your money. It’s a key metric to the pulse and health of a company. The better you understand the cash flow of the company, the better you will be in making decisions that push the company towards growth and health.

The Call to Action: Take Control of Your Cash Flow

So, how much cash flow per month is good? Only you can answer this, What are the real business issues, needs, and goals? What is the vision of the company? The answers to these questions should tie directly to your cash flow.

The Bottom Line

Whether you’re looking at cash flow for a house, a business, or a rental property, the key is to aim for positive cash flow. Remember, having a healthy cash flow means more than just surviving—it means thriving. It’s about having enough to not only meet your obligations but also to invest in your future.

So, how much cash flow should I have? Enough to keep you comfortable, secure, and ready for growth. Remember: the goal isn’t just to reach the top of the mountain. The goal is to stay there.