Cash flow break even is a critical key indicator, a way to measure the success or failure potential of your business and the first goal the small business owner must work to achieve if he is to remain in business very long.

Simply stated, cash in or cash collected is greater than cash out, payables, overhead, payroll, etc. on a monthly basis. It is very important to not confuse sales, or accounts receivable as being the same as cash flow. Collected revenue or cash received is the only money you can spend other than borrowed or invested capital.

If your cash in is greater than payable, all of the payables due that month, then you have a sustainable business and can build it up on its own power. This is critical for any small business as typically the availability of borrowed funds or investor money is either non-existent, or already consumed in the start up.

This being the reality for most small businesses, positive cash flow is the only source of usable capital and, thus, it must exceed payable and overhead requirements or the business is doomed to a slow but certain death.

Typically, in a situation where cash flow is not positive, accounts payable begin to get stretched out, paying later and later as you fight to collect receivables. Worse yet is when overhead becomes the target for supporting your negative cash flow. Payment to landlord and payment to vendors provides you with necessary components for your product or service. However, payroll is challenged as your negative cash flow fails to support your business.

Please do not confuse this with profitability, as a small business can experience positive cash flow and still not be profitable as it works to increase sales and revenues. Cash flow is simply the cash collected every month and, thus, allocated against that month’s payables. If it is positive, you may have a winning business equation, if is negative you had best turn it around immediately or you will begin to erode your capability to remain in business for long.

Measure and watch this key indicator daily, project weekly and if it is coming up short, you must respond by either increasing revenue in, or reducing payables out. There is no other option. Borrowing or investing helps ease the pain, and buys you some time but does not change the basic issue, cash flow in, cash flow out. Make it balance or risk failure in the near future.