We’ve been discussing how running your business is like following a recipe. You need the right ingredients in the right amounts in order for the dish to come out correctly. We’ve talked about profitability, which is a measure of profit relative to revenue. And we’ve also talked about activity, collecting your accounts receivable and turning inventory. The third ingredient is liquidity, or cash in the bank.
Every business owner wants to have a profitable business with lots of cash in the bank. The problem is that many business owners struggle with maintaining healthy cash flow and 82% of small business fail due to cash flow problems. Cash flow, not cash, is the ingredient here. Cash is an absolute number, but cash flow is the rate at which cash flows in and out of a company.