How to Run a Business - The Pot of Gold - Cash Flow

While many components of a business are important cash flow is absolutely essential. But what exactly is cash flow and why is it so important, particularly to a small business?

It is better to refer to cash flow as money that a small business needs to remain in operation.

The survival of a small business is dependent upon finances necessary to pay workers, to pay for raw materials and to pay day to day expenses.

It is cash flow that makes it possible to pay all these expenses.

The phrase cash flow is self explanatory as it means cash that flows in a business.

No business activity from the purchase of materials to actual production of the final product is possible if there is no cash flow, or if it stops abruptly.

So no cash flow means that you do not have a business to run any more.

It is thus necessary to use revenue wisely and set aside part of the amount for future expenses.

Do not utilize the entire amount for purchases of raw material or distributing among the employees in the form of bonuses; the next payment may not come for several days.

It is this small amount you have kept aside that will be required to fulfill the needs of the business. Do not leave something aside for fun or personal expenses.

Even legitimate expenses of the business may have to wait so as to maintain the cash flow.

Never underestimate the expenses that are incurred daily or incurred due to an unforeseen emergency.

If you think that the payment of another invoice is to come in the next 2 days and spend whatever you have leaving nothing to meet the daily expenses, you may happen to regret your decision, especially if a customer delays payment, thus making the business come to a standstill.

It is thus vital for any small business to keep track of the cash flow and plan expenditure accordingly.

It is prudent to learn to reduce expenditure in the initial stages of business development and think of any improvement or expansion only in later stages of the business development.

All this can wait until the business has become secure with cash flow having become stronger and greater.

Of course you need the inventory, but it is no use piling up inventory when the payment is coming in portions.

Secondly, do not buy things that your business doesn’t really need. Make expenditure only if it is necessary for the survival of the business.

Now that you know how important cash flow is to your business, you have to ensure that it doesn’t dry up abruptly.

Things that cause immense problems in this regard are erratic and delayed payments made by your customers.

Make it a point to talk about payment terms before finalizing a deal and if possible, include a term that asks for an advance payment.

If the customer is genuine, he will not hesitate to pay a small percentage of the full amount in advance.

Besides, advance payment also ensures timely payment on the part of the customer as he is aware that he has already paid some part of the cost and will get a new order on time only if he makes the payment on time.

You can encourage timely payments by offering a small discount on the bill amount.

There is also a policy of charging interest on late payments that forces customers to make payments on time.

This is useful as nobody wants to pay interest without a valid reason.
With every payment that you receive, set aside a major chunk for future expenses.

This will go on increasing the cash flow in the business so that you can manage for a few days even when there are delayed payments.
Think of cash flow as similar to a monthly salary that you have to make prudent use of.

If you go out and blow it all on a night of fun, you will have no more until the next pay day.

This will make it impossible to pay your bills and buy food for the family.

Similarly with a business you have to be prudent is spending the money that comes into the business to ensure you have enough to last you until the next time money comes in.

You also need to keep some in hand for any emergencies.

To learn more about planning, setting up and managing your business, visit the site section here featuring more pages with helpful how-to-do-it tips on how to run a business.

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