What Is Cash Flow And Why Is It Critical To Your Business?

The one thing that can determine the success or failure of your small business is cash flow. So, what is “cash flow”?

The simplest definition is it’s the amount of money you need to keep your business afloat. It’s like the blood in your body. If you run out of blood, you die. So, if you run out of cash, you’re out of business.

An easy way to master this concept is to picture your business checkbook. Will the balance be enough to pay the bills? As it is fairly easy to determine your expenses for at least a few months, will the revenue you expect to receive during that time allow you to continue meeting your obligations?

It will take a lot of discipline to consistently look at your cash flow on a daily basis when there are so many more interesting business issues vying for your attention.

You might even consider developing a spreadsheet customized for your particular business that requires you to make entries on a daily basis and thus keeps your financial situation at the forefront of your mind.

Cash flow can be seen from two different perspectives:

1. Prevention: Which focuses on managing the business in such a way that you are able to see problems that might arise before they become too large to manage.

2. Cure: Deals with problems once they have already reared their ugly heads.

Prevention, as is true in other aspects of life, is the best option in business management. The farther you can look ahead and search for any potential problems that may arise, the more likely you are to be able to head them off or at least lessen the toll they have on your bottom line.

If you do come upon an unexpected cash flow problem, you will have several options from which to choose.

  • You can borrow from your own personal account.
  • You can delay paying suppliers.
  • You can put off payroll for another week.
  • You can try to collect on past due balances.

However, the best option is probably to have a line of credit that you can draw from at your local bank. You can think of this as overdraft protection for your business checking account.

In order to obtain and maintain credit with your local financial institution, develop a relationship with your banker. Send him frequent financial reports in order to make him feel that they are seen as a part of your organization, not as an outsider.

The more he is kept informed about the financial status of your business, the more he will trust you and be willing to help you out of any unforeseen financial crises that do arise.


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