“Never take your eyes off the cash flow because it’s the lifeblood of business.” – Sir Richard Branson, business magnate, investor, author and philanthropist
When you are evaluating a business opportunity, a potential investment, or the overall valuation of a business, what kind of metrics do you like to consider? Do you look at return on investment (ROI)? Do you look at debt service coverage ratio (DSCR)? When it comes time to evaluate the performance of a business or an investment that you made, what do you care about most?
Truth is, when you are managing a business or looking at your investments, evaluating their performance is critical. Jack Welch, the Former General Electric CEO, author, and chemical engineer stated, “if I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow.” So, what is cash flow? In its simplest form, cash flow is the money that flows in and out of a business. Therefore, a positive cash flow means that more money is coming in than is going out. So where do profits come in and why is cash flow so important?
As Iberia Bank highlights,
“The goal of all business owners should be to have more cash coming in than going out. Cash is used to fund your payroll, cover your overheads, pay your suppliers and purchase equipment. What it really boils down to is that without a healthy cash flow, your business won’t survive. If you run out of cash, then it’s time to pack up.
Your profit’s what’s left over after you’ve paid all your expenses, and it’s what your tax is calculated on. It might seem odd, but there have been businesses that have gone under while still reporting a profit, and that’s because their cash flow was inadequate. So, while it’s important to focus on generating a healthy profit, the fact is that it’s your cash flow that keeps your business running.”
In layman’s terms, cash flow is the lifeblood of any business. If a business lacks cash flow, it can have difficulty growing, securing financing from banks or lending institutions, and attracting investors interested in the investment opportunity. Strong cash flow ensures that you have all of the required finances to continue operations and also ensures that you have the ability to reinvest into business growth and expansion.
Sources: 1. Carrillo, Cristian, https://quetzalcapitalgroup.com/blog/
2. Iberia Bank, Why Cash Flow is More Important than Profit
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