We are talking about the top things small business owners struggle with and this week the subject is cash flow. We will start by talking about what cash flow is and then next week we will talk about how to manage cash flow.
Small business start ups are often not expected to be profitable in the first year of operations, however having adequate cash flow is of paramount importance. A well written business plan is the first key to insuring adequate cash flow for a start up. After the start up phase has passed, the small business owner still needs to keep a close eye on cash flow.
What is cash flow? Cash flow is the difference between the pace with which money comes into the business and the speed with which it leaves. This differs from profitability due to several factors. A business can be operating at a loss but still have enough cash coming in to survive due to proper financing. This is true during the start up phase but can also be true during times of expansion or economic hardship or seasonal issues. Many retailers operate at a loss or at break even until the holiday season. They need to purchase inventory before the holiday season, but they won't see the money from the sale of that inventory until later. Obtaining extended terms from a supplier or using a line of credit from a bank is an example of managing cash flow. Conversely, a business can be profitable and still run into cash flow issues. A business going through a period of rapid expansion may see this occur. They are purchasing inventory or new equipment or added staff to handle the sales growth but the cash flowing out for the purchases may outpace the increase in revenue.
There is a popular saying in the business world "cash is king" and cash flow is a prime example. Next week we will dive into ways to manage cash flow.