The other day I listened to a story told by a very successful business consultant who after a number of years of building his business to the point of $17M turnover sat down with his accountant at year end to be told that he had made $384 profit (no I have not left off any zeros…).

What he realised was that he was not cash rich in his business. Yes he had plenty of assets and was personally very wealthy but his business wasn’t showing a positive cash flow. He walked away from the business selling it to someone else.

What many of us fail to understand in business is that we need to be generating a positive cash flow in order to feed our growth.

Without the cash to fund your business you fail to innovate, develop new products, find new ways to market and develop the way you carry on business. If you do not have the cash flow you can not expand your business geographically or with market penetration. All of this requires capital input and the best source is from your own sales turnover. Increasing sales, profit margins and reducing costs are some of the ways of achieving this and these aer certainly better than borrowing funds.

With a positive cash flow you have the opportunity to reinvest in your business on initiatives that will deliver sustained business growth.

A simple measure of your cash flow is to simply look at the monthly balance of your current assets. Another common measure is to look at the business Growth Capacity which is expressed as :

This is a ratio which shows whether the business can afford to fund its growth. If the result here is a large positive number, then “growth” should be reasonably easy to fund; if the result is negative, then growing the business will demand more working capital than the additional profit which is generated. A negative (or even a low positive result) is therefore a warning sign. To improve this ratio, either work to increase the “profit” aspect of the equation, or work to reduce the working capital requirements of the business.

So how does your business measure up? To get a better picture do this calculation for each of the last 4 or 6 quarters of business trade. What is the trend over time? If the ratios are decreasing then you might want to look closely at what is going on or if any particular events can explain any anomalies.