We all know that cash is king. However, understanding how cash moves within your business can be confusing, especially as your business grows in size and complexity. This is where cash flow control is important.
If your business is generating profits, it will generate cash flow. And if your business is losing money, it will also reduce cash flow.
Another area you can impact cash flow is your investment in your business. A growing business might be profitable; however, the investment of the business profits into working capital can result in the business burning cash flow at an alarming rate. Many start-up businesses have such a high need for investment into working capital that they cannot grow at the speed the market will otherwise allow.
Many family-owned businesses will fund the investing cash flow by contributing personal cash to give it the working capital needed, or they will take reduced wages (“sweat equity”). So, the business can fund investments into plant and equipment and working capital.
Likewise, a shrinking business is typically reducing its investments in working capital. So, the business can generate a positive cash flow as it reduces its working capital (or sells investments).
If you borrow money from a bank, you can increase cash flow, and if you repay money to the bank, you will reduce cash flow. The same concept applies to shareholder loans.