To successfully manage and maintain a small business, just like with a home and family, you have to be disciplined and attentive in managing your cash flow. Even while making healthy investments and spending for long-term planning, it’s essential that your cash flows stay positive and that you always have enough liquidity to handle any emergencies that come up. This means more careful planning on your part, but the effort pays off. Here’s a little bit more about cash flow and what makes it so important.
The Importance of Cash Flow
Cash flow simply refers to the flow of money in and out of your business. It has to do with how much money you actually have immediately available at any given time. Cash flow is positive when you have more money coming in from income or sales than you have going out.
Cash flow can get negative and unhealthy because of too many expenses and not enough income, or simply because of bad planning. Buying a lot of new inventory can be an important investment, but it does reduce your cash flow. If you buy too much inventory at once, or if customers are slow at buying it up, your money will be tied up in that investment and your cash flow will suffer. Your cash flow can also be affected by how customers pay. If too many customers use credit, you may experience a significant delay in getting those payments, which can be difficult for a small business.
Cash flow planning is essential for being able to manage regular expenses like rent and loan payments. It’s just a question of having the money available at the right time. However, cash flow is one of the most common reasons that new small businesses don’t make it. When budgets are tight and money going through your business is already limited, it becomes even more important to plan and tightly control your cash flow so that money is available when it’s time to pay expenses and make necessary investments. “In life and business, sudden costs can come out of nowhere,” says Edward D. Friedman, personal injury lawyer in Jericho, NY. “Those unexpected emergencies can be crippling if you’re not prepared.
Tips for Staying Afloat
Every small business has expenses and may have to borrow to pay for certain necessities. However, that means always putting aside a bare minimum of cash to cover those regular debt payments. Sometimes you have to say no to growth opportunities that don’t come at the right time, as the risk of running out of cash from that investment is too high. Always stay on top of all of your expected inflows and outflows so you can be prepared for any situation. When you have extra positive cash flow, that’s when you can be flexible and start taking advantage of investment opportunities.