Guest blog submitted by Virginia Cooper
Small business owners who aren’t aware of the importance of cash flow, and do not monitor it closely, are taking an unwise risk. Yes, you might get lucky and stay above water thanks to good marketing and a good product. But even if you end up with a positive income, that is not the same as a positive cash flow. Believe it or not, a business that is theoretically profitable could get itself into hot water due to an unhealthy or poorly sustained cash flow.
What’s the difference between cash flow and income?
While income relates to the total relation of profit to expenditures, cash flow has to do with the pattern of money in and money out. For instance, you may go months with little income, then finally be paid for a large project near the year’s end. While the money you are paid may be more than the money you spent, overall, there may have been periods of time when your company had more money going out than coming in. This would constitute a cash flow slow down.
Why is cash flow so important?
Cash flow is important because those months where your cash flow slowed to a trickle may have done financial damage. Maybe you were unable to pay bills on time and ended up with late fees. Or perhaps, you couldn’t meet payroll and had to pay fines. If you were unable to purchase needed inventory, this might have adversely affected production or limited sales. Or you may have missed helpful discounts. So, clearly, even if a business can make it through a few phases of cash flow slow down, if it becomes the norm, this will be detrimental to income and to your company’s health.
What are the chief issues that can interfere with cash flow?
There are a variety of causes of inadequate cash flow. Some may easily be eliminated, while others could indicate deeper-rooted company problems. A major cause of cash flow problems is loss of sales. If this is the case for your company, this calls for some major overhauls, before it is too late. Another sign that your company has problems is an overabundance of debt. A company that is deep in debt and losing customers has issues that probably go beyond cash flow. Other issues are more manageable. Trying to grow your business too quickly, which can lead to negative cash flow, is something you can control once you realize it’s causing problems. And if you are simply paying too much on overhead and inventory, you may be able to find more affordable alternatives.
How can you improve your cash flow?
If you’re looking at a good income, overall, but are concerned that your cash flow is too sluggish, find ways to speed things up. You are probably already taking payments online, but check to see whether any of these payments are being delayed for any reason. If your cash flow problems are related to steep expenses, consider renting or leasing equipment and property, instead of buying.
What can entrepreneurs do to ensure that cash flow stays healthy?
First, monitor cash flow closely, so you detect any developing problems and solve them early. Second, make sure your company is protected from potential loss, with good business insurance. You can add security to your company by registering it as an LLC, which will give you extra liability protection. You can work with a formation service to start an LLC. Third, go over your budget and see whether you have any unnecessary expenses that can be eliminated now or high payments that can be reduced.
With cyber threats on the rise, you’ll need to protect your business from malware attacks. It’s also critical that you have a data recovery plan in place if you’re ever victimized by a cyber attack. Your plan should establish which data you’ll need to recover first and which employees and vendors will be responsible for your recovery efforts. Ensuring that you can recover quickly from a cyber attack will preserve your cash flow.
Since cash flow problems are one of the biggest reasons for a small business’s failure, stay on top of your finances and watch cash flow closely. Your business will do better if you are able to maintain a healthy cash flow from one month to the next.