Understanding Cash Flow is the Key to Success

Understanding Cash Flow is the Key to Success

Importance of Cash Flow

Throughout my academic career at Lynn University I heard the same phrase uttered over and over, seared into my memory; “The most important thing in business is the cash flow, the timing of that cash flow, and the risks associated with that cash flow.” It always sounded like a logical ideology, but it wasn’t until I gained experience in numerous fields that I truly realized how universal this advice really was.

At the Lynn University College of Business, our Dean at the time Dr. Ralph Norcio repeated this phrase in every class I had with him. Eventually, I realized that it was the best business advice I had ever received. Whenever I evaluate a business, product or opportunity I always start by evaluating the cash flow, the timing of receiving that cash flow and the overall risks associated with creating that cash flow. It is the foundation for most of the business decisions I make to this day.

Cash Flow

Let’s be honest, the purpose of going into business is to make a profit and cash flow is the lifeblood of any business. It is great to THINK about a business and imagine how much money it can make, but it needs to pay the bills in the interim. If the business can not bring in funds fast enough to cover the expense, the business is going to have a short life. In an honest evaluation of a business you have to consider the amount of cash it can generate and the amount of cash you have to continually spend to make that profit.

Timing of Cash Flow

Accounts receivables are nice, but they don’t help you meet payroll on Friday. You have to understand the timing of the cash flow to understand the financial cushion needed to keep the business solvent throughout its fiscal cycle. The timing of the cash flow will determine the capitalization needed to fund growth, research, and development. Mismanagement of your cash flow timing will result in your new venture becoming insolvent.

Risks Associated with the Cash Flow

Cash flow is great, but you need to evaluate the risk associated with creating that cash flow. If you have to put $1,000,000 at risk to make $1,000 profit then you can probably find better things to do with your capital. The cash flow created has to justify the amount of risk you are exposing your capital to during the life of the investment.

The profits in drug dealing are very high. This is in part due to the high level of occupational risk involved in their business. The risk has to be worth the reward or the venture simply does not make sense.