Why Cash Flow Is So Important for Startup Businesses
One of the biggest questions asked by new entrepreneurs is what is cash flow, and why is it so important? In short, cash flow is the amount of money which is coming into and going out of a business. A good example of this, in order to help you visualise it, is a water tank – water comes into the tank at the top and is drained out at the bottom, so in order to ensure that the tank stays full you will want more coming in than is going out. This is the same for businesses – in order to ensure that a startup is successful and runs into minimal problems, it’s important to ensure that there’s more cash flowing in than out.
Cash inflow is what keeps your business ticking over financially, and is gained from sources such as customer payments, money from investors, or loans from the bank. For startups, cash is the most important factor as it later becomes payment for things which enable your business to run, for example stock and raw materials, rental and lease fees, employee wages, and other services. Naturally, a positive cash flow is preferred by all businesses, no matter the size or age. Positive cash flow enables your business to run smoothly and allows you to make further investments to grow your business – for example, you can use it to pay for six sigma online courses for your employees.
Organisation and Planning
A high positive cash flow is generally achieved by two things: organization and planning. Ensuring that you are organized and adequately plan ahead is vital to ensure that your startup experiences a good cash flow. For those just starting a business, it’s vital to ensure that planning regarding cash flow is done straight away. This includes creating a budget and working out any expected regular monthly incomings. It’s also crucial to work out your expected monthly expenses, which you can then subtract from your incomings to determine your cash flow. If you think that your cash flow may be negative, cutting any unnecessary expenses is required.
Improving Cash Flow
Depending on the industry which your business operates in, there are a number of ways in which you can improve your monthly cash flow. One of the most common ways in which to do this is to cut out any unnecessary expenses in order to reduce your monthly expenditure. On top of this, you can also improve your incomings. For example if you are paid by clients, sending invoices straight away and requesting that they are paid by a certain date can help ensure that you are paid on time. If you sell products and/or services, determining which are the most profitable and investing more effort into marketing and advertising them can help you to bring in more sales and therefore more income.
As a new startup, your cash flow is one of the most important factors to take into consideration. Getting started on the right foot with your cash flow can ensure that you have a better chance of success down the line.