Keeping a close eye on our cash, sometimes even to a point of paranoia, is an essential discipline in running a small business, particularly during its immediate post-start up period. Why? Because, we are so often unaware of the likely highs and lows of our business at this embryonic stage, what competitive forces are out there, what is affecting our customers' buying habits and so on. Then, of course, in the back of our mind, we need to remember that insufficient cash is a major reason why so many small businesses barely get off the ground and eventually fail.
So what is cash flow? Put simply, view it as how much is coming into the business as a result of your technical skills, sales and promotional efforts and, you've guessed it, how much is going out to repay any loans and, of course, to cover the expenses required to run the business. These would include rent, salaries, accounting costs and consumable items etc. If we lived in a COD (cash-on-delivery) world this task of constant monitoring would be a lot easier as we would have a day-by-day picture of money physically coming into the till and, likewise, what is going out. In the real world of course, customers often don't pay at the time of buying your products or services as a result of which your cash flow is dependent on collections of 'accounts receivable'. On the other side of the ledger (accounts payable) you have some suppliers who are happy to provide you with their goods or services on credit. As a result you need to balance what you are expecting to come in from your customers and what you owe your creditors.
So what if your business is impacted by seasonal fluctuations at different times of the year? Imagine if we were a business located in a ski resort or if you're one of the building trades which invariably go quiet over the Christmas and New Year months. This can really test us as we need to ensure that we create sufficient reserves during the 'good times' to ensure our survival in the lean ones.
There is a lot to say about this important topic but the more we are aware of the ins and outs of our business and the trends that affect these two way money streams, the more effectively we can Manage our cash flow as you will see by way of the tips offered in this helpful link.
Ted Beecher, BLA Director