Melio Explains

Melio explains: What’s cash flow?

As a small business owner, you must know that cash is king. But what does that actually mean? Why does your cash flow always need to be positive? And how to make that happen? We’re here to explain.

Melio explains: What is cash flow

A little bit more about cash flow:

Cash flow is the movement of money flowing in and out of your business at any given time.
Why is it important? You most likely need cash to pay vendors, suppliers, your marketing agency, your rent, and so on. Meaning, to guarantee that your business runs smoothly, you need cash on hand. When you have no cash, your business will likely struggle. Understanding the concept of cash flow and how crucial it is can help you keep your business moving forward.

Let’s take a look at some real-life examples. Brian owns a car dealership in Seattle. He sells new and used cars, offers financing options, and also has a service department. Because he needs to purchase vehicles before he can sell them, he needs big cash reserves, or to rely on loans. Right now, the market is not the best and people buy new cars less often. This means Brian has an excessive number of unsold cars. As he continues to incur expenses for the purchased inventory but struggles to generate enough sales revenue, he is now facing negative cash flow—meaning he spent more money than he earned.

But wait, Brian is owed some money from customers. As he also provides financing options, he is expecting to receive more money in the next few months—including interest on cars already sold. If the cash expected to come in is higher than what he spent, that means Brian is profitable–even though his cash flow is negative. That’s great news.

What about positive cash flow; what would that look like? Katy is a franchise owner who operates a branch of “Gourmet Burgers” in Austin. Katy needs to pay monthly fees to the franchisor. These add up, but being a part of a well-known franchise provides an established brand and customer base. This means she has very high sales and a lot of regular customers. So, the fees end up being a small percentage of the total revenue.

She also needs to pay different vendors, rent, other bills, and payroll. But by being a part of a franchise, she gets help with the budget. This helps her keep expenses lower, meaning she has enough cash for the things she really needs—like a new coffee machine that recently broke.

Having positive cash flow means you have enough money not only to pay for supplies, taxes, etc. but to see the business you’re dreaming of come to life. It means you have extra cash for unexpected expenses or for growing your business. Maintaining positive cash flow gives your business more resilience during uncertain times but also allows you to invest in innovation and manage your business smoothly, with low risk and more peace of mind. And if everything goes well, you can even think about booking your next vacation.

*The purpose of this page is solely to provide information and should not be considered as financial advice
**Melio does not provide legal, tax or accounting advice; you should consult a professional advisor before making any financial decisions.