Why does cash flow matter?

Finance
#1

There’s a famous saying in business: “Revenue is vanity, profit is sanity, cash is reality.”

Simply put, financial management begins and ends with cash. If you don’t actually have cash on hand for your business needs, you start hitting blockers in your operations. Managing your cash flow is all about figuring out when you’re going to have cash in your hands, figuring out how to get more of it in your hands faster, and how to manage your spending so you don’t run into cash flow problems.

Learning to manage cash flow is a foundational building block for managing your business finances. If you’ve got that down, then you can start thinking about how to really grow your business and improve your margins and profit.

Cash accounting vs. accrual accounting
If your business uses the cash accounting method, then your books will pretty closely match the cash reality of your business. But if you use the accrual accounting method, then measuring your cash flow is doubly important.

Why? Because accrual accounting is more of a long-term, big-picture way of understanding your finances.

Let’s say you run a design agency, and you just wrapped up two huge projects with a company. All the work in the contract is complete, and you just sent the invoices. Under the accrual method, you’d put that revenue in your books as soon as you send the invoice, even if it takes the client six months to actually pay you, and your bookkeeping will not match the cash reality of your business. That’s why understanding cash flow matters.