As we discussed last week, understanding the difference between sales and cash can make or break a small business. It’s important to get a handle on this difference and the ever-important cash flow.
What is cash flow?
As the name suggests, cash flow is the flow of cash through your small business during a period of time. Cash is your most important resource and you must keep a close eye on it, especially during start-up.
Conducting a cash flow analysis is an important step in determining the overall feasibility of your business idea. Last week we talked about cash crises that could arise if you’re waiting for a payment from a sale – for example, if you’re a freelance graphic designer waiting a couple of weeks for last month’s invoices to be paid by your clients. Proper cash management will mean you have enough cash saved up in case of a shortfall.
A cash flow statement is a tool that helps small business owners “time” cash in-flows and out-flows. “Knowing ahead of time” is the basic premise behind managing cash flows. Cash flow statements list sources and uses of cash over time, usually month to month, so that business owners can analyze and anticipate those times when cash might be tight. Lack of proper cash flow management is another factor associated with small business failure.