What a New Business Needs to Know About Cash Flow
Starting a new business can be incredibly exciting and daunting at the same time. There are so many things to learn and challenges to overcome to be successful. At that heart of it all is cash flow.
What Is Cash Flow?
In essence, cash flow is the money that goes in and out of your business in a month. That cash can come in the form of customers buying your services or products either at the present moment or by paying an invoice. The cash can flow out of your business in the form of payments, including rent, utilities, employee wages, taxes, or other accounts.
At the simplest level, cash flow is basic accounting and keeping track of what’s coming in and what’s going out. But there are some things that you should understand about cash flow if you want your business to succeed.
Cash Flow Is Incredibly Important
Not only does your company need to make a profit, but it also needs to be cash flow positive. Since this money is the working money that keeps your business afloat, if you don’t have money coming in to pay for your daily running expenses, your business won’t survive.
Cash Flow and Profit Are Two Separate Things
Since cash flow is important to keep your business running on a day to day basis, it is the money you have on hand, not the money you make from customers. You can be making a ton of profit but still be hemorrhaging cash to pay business expenses. Without having cash on hand to pay for your daily expenses, your business will probably fail.
Of course, having profits can help with cash flow, but they aren’t the same thing. Think of it this way: your profit is your big picture income, including money from customers who haven’t yet paid their invoices but will eventually, while your cash flow is what you have in your account right now.
Short-Term Negative Cash Flow Is Okay
It may happen at one point in time that you’ll have more money going out than you do coming in. This can happen if you rely on invoicing customers instead of having them pay upfront. There will be a gap between when the service or product was sold and when the payment is received. This can be okay as long as you have a cushion in your account and your checks continue to clear until payment is received.
Cash flow can be confusing, but talking to a professional will answer any questions you may have and help you manage your cash flow so your business can be successful.
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