Cash flow - the most important aspect of your business!

by Fred F. Richards, Jr.

Why is positive cash flow important?

First, without positive cash flow, you have to either borrow money from your bankers and/or vendors through increased trade payables, or raise additional equity.

Second, the "Burn rate" is simply "negative cash flow relative to a time period of measurement."

The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations. It is the rate of negative cash flow, usually quoted as a monthly rate. It is calculated by taking the amount of cash on hand and/or available through the company revenue and debt infusion streams and subtracting the cash outflows and debt repayment for the same period. Generally, it is calculated over a month or longer period although in some crisis situations, the period might be a week or shorter.

The chances of success and survival dwindle at the same rate as the cash evaporates.

Burn rate is generally used in terms of cash spent per month. A burn rate of 1 million would mean the company is spending 1 million per month. When the burn rate begins to exceed plan or revenue fails to meet expectations, the usual recourse is to reduce the burn rate (which, in most companies, means reducing the staff). If you really want to see why the burn rate is important, click here for further elucidation.

Third, failure to generate positive cash flow has all types of negative connotations, i.e., management changes, staff reductions, need for addtional cash infusions from either debt or equity sources, or finally, bankruptcy.

Finally, despite all the good feelings the company has towards keep its employees happy and smiling, all the awards for community betterment, all the smiles on employees getting their free soda's and pingpong tables for recreation, or the fancy gymnasium to keep the body toned, if the company does not generate positive cash flow, changes will be made and most of them won't be beneficial to the company's employees and/or shareholders.

Fred Richards

Last updated - February 28, 2007