Income vs cash flow

Income refers to the amount of money you earn from selling a product or rendering a service. This money could be paid immediately or at a later stage. Either way the money accrues to you. If the money is not paid immediately there is a chance that it may not be fully paid back.

Cash flow refers to the money you get to keep after paying off your expenses. It is your inflows less your outflows. The idea is to have more cash coming in than going out. Cash flow is king in finance and negative cash flows will drive you deep in debt and cause you untold stress.

It is possible to have high incomes but have negative cash flows. You may bill for your services and fail to collect yet you have suppliers to pay. This will create a cash squeeze in your business. You could also have high incomes but high expenses at the same time. This will wipe away your cash flows. The trick then is to carefully balance your incomes with your cash flows.

Cash flow can be improved by doing a couple of things:

  1. Limit the amount and days of credit to customers;
  2. Rationalize your expenses;
  3. Limit inventory pile up;
  4. Negotiate with suppliers for better terms;
  5. Improve your margins on your pricing;
  6. Re-invest excess cash flows in short term liquid investments;
  7. Limit borrowing as much as possible; and when you borrow allocate the money to its intended purpose; and repay happily when the money is due.
  8. Get flexible short term financing like an overdraft to cater for temporary cash squeezes;
  9. Match financing with appropriate investments. For instance use long term financing for long term projects like real estate. Don’t go to a money lender to build apartments! Money lenders should only be used for emergencies. 
  10. Improve controls to minimize wastage of cash and resources;

Focusing on cash flow rather than income will greatly improve one’s odds of succeeding with their finances.

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