You recently started a business, congratulations! I remember well the early days of my accounting firm. You never forget the exhilarating newness of stepping out on your own and seeing what the future holds. What future awaits your company? I guarantee it will be bright if you study up on your business’ finances, starting with a key term in your new entrepreneurial vernacular: cash flow.
Believe it or not, many business owners don’t prioritize cash flow. Their logic seems sound: cash flows in, cash flows out, use cash when you have it, cut back when you don’t. Nothing could be farther from the truth. Your business won’t survive in the long run without generating positive cash flow. What does this mean? How does it work?
Here’s my quick rundown of cash flow as a professional accountant:
Cash flow is the net amount of cash moving into and out of a business at a specific point in time. Think of the different ways a business generates revenue: payments received from customers, dividends received from investments, royalties received from assets. Now, think about the ways money flows out: paying employees’ wages, monthly payments on a business loan, taxes. Simply put, cash flow is the air your business breathes.
The key to generating positive cash flow is strategic fund allocation. It’s easy to think of ways to spend money once we get it. In fact, it feels natural. You need to spend money to make it, right? Wrong. The best way to generate positive cash flow is to identify different “pockets” of your business to distribute every dollar into (i.e., employee salaries, insurance, savings, taxes, your own salary).
Remember: cash flow is the air your business breathes. Some comes in, but not all of it stays in. Some must come out (a.k.a. be distributed).
I want to see you 5, 10, 20 years from now living your dream life. To do that, you need to prepare now. There are several other things you should be thinking about when it comes to cash flow for your business that SMG’s Bookkeeping Boot Camp covers in full. Our monthly course is designed specifically for small businesses, providing professional support, accountability, and knowledge at a fixed, affordable price. You won’t regret registering – sign up today!