You’ve probably heard people complain about cash flow and maybe wondered exactly what that means. Simply put, the money that comes into and goes out of your business is your cash flow. In good times, proper cash flow management is the key to profitability. In hard times, cash flow management is the key to survivability – allowing you, for example, to pay employees and your rent even when a major customer goes belly up. Think of cash flow as your business’s lifeblood. If it is interrupted – and this is true even for highly profitable ventures – it can lead to a business’s cardiac arrest.
Cash flow is really no different than a family budget, if you know what your monthly pay is and if you know what your expenses are, then you know whether or not you can afford to go out to dinner. That’s basic cash flow, knowing when to spend and when not to spend money.
Knowledge is King
Cashflow is about knowing when to buy things, how to buy things, and when you do buy them, knowing how much will be left over to pay for other expenses. As an example of questionable cash flow management, I once knew a printing business that got a big job, ordered a lot of paper to do the job, got paid for the work and immediately spent all the income on a brand new printing press. Unfortunately, the owner hadn’t paid the invoice for the paper. The result?
The owner created a cash flow problem by failing to account for costs before making a major purchase.
You can avoid many common cash flow problems by speeding up the payments of accounts receivable – for example, by accepting credit and debit cards, issuing invoices and accepting payments electronically, or using remote cheque capture to deposit cheques directly from your office without making a trip to the bank. You can also head off cash flow dilemmas by running monthly reports – particularly an income statement and a statement of accounts receivable – on a regular basis.
Once owners see the cash stream running every month, then they can prepare; they can start making changes. We’ll show you how to read and use these reports in later articles.
So here’s a question….
What do Richard Branson, Walt Disney, Coco Chanel, Henry Ford, Ray Kroc, and Milton Hershey all have in common?
The answer? They all created business empires without earning a high school diploma. But even though you don’t need a formal education to start a business, you still have to understand some accounting principles, take care of bookkeeping procedures, and most importantly, be able to make basic decisions based on your information. So, don’t let a fear of numbers keep you away from business finances.
So as we continue to write articles for YBKBS, we’ll try to update your ideas of how you can get used to maximising your knowledge of how you can have the small business you deserve by understanding your business finances.