The simple definition of cash flow is the money that goes in and out of a business within the period of any given month. Many times, small business owners might feel as though the cash only flows out but the truth is that cash does flow both ways.
Your cash will come in from customers and clients who are purchasing your products or services. If customers do not pay the time of the purchase, then you will collect your money from collections of accounts receivable.
Cash going out will be used to pay things like salaries of your employees or paying other expenses like rent or utilities that your business needs to function. You will also have to pay taxes and other accounts payable.
Remember that in order to maintain a “positive cash flow” and to keep your business in good standing, you will need to make more money than you are letting go out. If you are not able to make more money than you are spending you risk over drafting and will have to come up with a way to make that additional money so you can cover your expenses as you incur them.
Cash vs. Real Cash
Many businesses such as retailers see real physical cash every day. Many times, these businesses will be able to pay their expenses off in actual cash. This can create the challenge of keeping track of a business’s cash flow. Many times, bookkeeping and careful monitoring of the flow of cash is necessary to ensure that the cash is being handled responsibly. Moreover, cash businesses are more likely to be audited by the IRS.
Why is Cash Flow So Important?
Not having enough cash is one of the biggest reasons for business failure. If companies cannot take in enough cash to pay off their expenses and turn a profit, they will quickly be forced to shut down operations. “Running out money” will bring a startup to its knees faster than almost anything else in business.
Cash Flow as You Begin Your Business
One of the biggest challenges in starting a business is having enough cash flow to get things going. Many times, new businesses will not have any customers or a lot of customers or clients so the cash flow can be scarce. Needing up-front cash may require a new business to take out a temporary line of credit to get the money they need to get things started up till business picks up and expenses can be paid.
Cash Flow vs. Profit
Your business can be making a profit but not have any cash. People will ask: How is that? Profit is simply a concept of accounting while cash is a physical amount of money that is in a business’s checking account at any given time. Businesses can also have assets like their account receivables (money owed to the business by customers) but if it hasn’t yet been collected than the business will not have cash on hand.
How Do I Determine Cash Flow?
Your business will need to run a cash flow report in order to keep the best possible track of their finances.
A cash flow statement will determine the difference between the money you are taking in and the money you are putting out for expenses to determine your business’s overall “cash flow”. Determining differences in business account balances can help indicate if cash flow is positive or if there is a problem.
You will want to keep a track of your cash flow on a weekly or even daily basis. If you notice that you are having cash flow shortages on a consistent basis then it will be time to reevaluate how things are going and implement changes to help your businesses thrive.
For more information on how to determine if you have a positive cash flow at your business or if you need help instituting a way to track your business’s cash flow, please feel free to contact Goldendale Capital for further assistance to help your small business thrive.