If you think you have a great service or product, then people will pay for it. And if they pay you sufficiently, you will be able to pay your expenses and acquire needed assets, like computers and desks, and make some profit. If not, then you are out of business and have, at most, an interesting hobby. This is essentially Peter Drucker's definition of a product: something people will pay for. No pay, no product. No product, no business. It's that simple. I'm sorry, but it's the american way.
Okay, you've gotten past the first hurdle and customers are paying for your product or service. Perhaps you conducted informal market research, or had indepth experience in the target industry to launch your business. Or, perhaps you were just lucky. Either way, the money is pouring in, or at least you think so. Now what?
Successful technology-based businesses require a team approach: someone who knows the industry/product and someone who understands financials. Sometimes they are the same person, and if so, not for long if the business takes off. As CEO you must watch the bottom line. Your decisions are always bottom line based. This is not to say you shouldn't take gambles, but to realize the impact of your decision on the upside, if all goes well, and on the downside, too, if problems arise. There are decisions you cannot afford to have go wrong, because they could spell disaster to your firm if indeed they do go wrong. Like, you spent your very scarce cash on very unorthodox packaging and the customers didn't bite. Now there's no cash left to try a new packaging approach.
So you ask, what's my cash flow? Assuming you get monthly financials (great going!) from your accounting package, or accountant, how can you find your cash flow. Well, it's not your net income or net profit. Neither is it net income plus depreciation and amortization (Uncle Sam's gift to businesses). Nor is it retained earnings (accumulated net income) or equity (what you put into the business, either initially and/or subsequently).
The formula to arrive at your cash flow is:
NI + DP + AM + dP - dR - dA = CF where, NI = net income DP = depreciation AM = amortization CF = cash flow dP/dR/dA = changes in the amount of accounts payable, accounts receivable and assets, respectively, for the period
Let's follow along. "NI + AM + DP" equals the cash from "operations". It doesn't represent the cash available to you because 1) if you don't receive the money you have less cash and 2) if you don't pay bills you have more cash. Yes, eventually you have to pay bills, but not necessarily receive all the money due you. Cash not received from sales goes into "accounts receivable". Cash saved by not paying incurred expenses goes into "accounts payable". The part of the formula "dP - dR" nets these effects on your cash flow. Finally, "dA" represents the additions to your assets - equipment, furniture, etc - that used some of your "hard earnings". If you borrowed money to acquire the assets, this would be reflected in the "dP" or payables portion of the formula.
Why should you care? A quick example concerning a growing business. What happens when you experience a rapid sales increase? First, your receivables go up rapidly -- "dR" increases and reduces your cash flow. Second, you will need additional equipment, like more computers for a larger staff to handle more calls -- "dA" will also rise somewhat and will also reduce your cash flow. With things getting "tight" you begin to slack off on paying your bills and "dP" increases with a cash savings to you. BUT, THIS CAN'T LAST FOREVER because your suppliers and Uncle Sam will eventually shut you down for non-payment. So you need cash to pay your bills. GOOD LUCK!