One of the most difficult parts of running a small business can be managing the cash flow. You may ask, “What is cash flow and why is it important?” Cash flow is essentially the money coming in and flowing out of your business. Managing cash flow can be a deciding factor in whether your business will succeed or fail.
Your business will fall into one of two categories at any given time – positive or negative cash flow.
If you take in more cash than you pay out, good for you – you have positive cash flow! Sources of cash coming into your business can be customer sales, investor funds, interest earned from savings & investments, and loan receivables. Having a large positive cash flow can lead to new business opportunities such as hiring more employees, opening new locations, and adding services or product lines.
If you have more cash flowing out of your business than coming in, watch out! This is negative cash flow, which could mean your business is losing money or simply reflects poor timing of income and expenses. Negative cash flow does not necessarily mean loss; however, it may indicate ineffective credit management, leakage of funds through fraud, or actual loss. A business with long-term negative cash flow is unsustainable. Long-term negative cash flow is harmful to your business’s finances and over time, you will run out of funds if you cannot earn enough income to cover expenses. Good news is you can remedy this situation by generating or collecting more cash while maintaining or cutting expenses.
Here are some Cash Flow Management tips for small business owners:
Many business owners have the common misconception that profits and cash flow are the same thing. They are not. Remember cash flow is the amount of available cash in a business at any given time as a result of the inflow & outflow of money. Understand profits do not always correlate to having a positive cash flow. Your business may have high gross profit; however, at the end of it all can have a negative net profit. This means your costs are greater than the income coming into the business.
Cash flow is the lifeblood of your organization and owners that cannot efficiently manage their business cash flow are almost destined to fail. It is a key component to the financial health of your company. Make a habit of managing your cash flow.
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