The Ins and Outs of Cash Flow for Your Business
Many financial institutions toss around the word “cash flow” as though everyone knows what that means. If you’re running a business and don’t know about cash flow, it’s time to get educated. Knowing about this important concept could be make or break for your success.
What Is Cash Flow and Why Is It Important?
Cash flow is the money that flows into and out of your business. If you only pay attention to one side – the money going out or the money coming in – then you aren’t seeing the whole picture. The money going out is usually for rent, utilities, wages and other payments that keep your business running. The money coming in should be from investors and customers.
The Small Business Administration says inadequate cash reserves are the top reason startups fail. If that’s too fancy of terminology, it’s also called “running out of money” and it spells doom for businesses.
How Is Cash Flow Analyzed?
Analyzing the flow of money in and out of your business requires keeping clear and up-to-date records. These documents and numbers should include all payments your business makes and all money it receives. This this data I hand, you can see if you have more money going in or out. You can set up projections about where your cash will be in the next weeks, months and years to better make business decisions.
How Does Cash Flow Work in a Startup?
During the startup phase, cash reserves are usually at their lowest. This is due to purchasing equipment, goods and building space. You may also be spending money to pay and train new employees, conduct market research and in advertising. All of this is going on and you might not even have customers yet. However, temporary sources of income, such as a line of credit, are available so startups can get off the ground.
How Does Cash Flow Work in a Seasonal Business?
Seasonal businesses have a different but no less awkward relationship with cash flow. This kind of business has a boom period and a slow period. One example is a swimming pool that is only open during the summer. During the slow period, cash may slowly bleed out, but if the boom period is strong enough, there’s no problem.
Understanding cash flow is important to ensuring the future of your business. When you understand where your money is coming from and going, you can plan for the future and weather dry spells.