Running a small business takes a lot of work, and quite a bit of that work revolves around money. Naturally, you want your business to be successful and profitable, which means you need to watch your profits, petty cash, and cash flow. You must understand the differences between these three elements, and then learn why cash flow needs to be watched.
Understanding Cash in Your Business
Let’s look at cash flow first. This is the money that is flowing into and out of your business. When you have a positive cash flow, it means that you have more money coming into your business than going out of your business. This is a good thing. Cash flow is just as important as profit when you are trying to gauge the overall success of your business.
Interestingly, you might find that you have a high profit, but you have low cash flow. Even with a high profit, this situation could mean that you have problems with your business. It could indicate that you are ordering too much stock, for example. It might also indicate that there are areas where you’re spending too much.
The petty cash in a business is simply the money that’s kept on hand to make purchases as they are needed. This money is typically used for making small purchases, such as buying lunch for the office, taking a client to dinner, etc. Petty cash is helpful, but many companies do not track their petty expenditures properly. It’s important that you do. Keep the receipts and log the expenses. You can do this manually, and you can find apps that could help.
Your profit is the money that you have left after all of your other costs have been calculated and deducted from the revenue.
Naturally, you want to have a high profit. If you discover that your costs are greater than your revenue, though, it means that your company is in financial trouble. A company can’t last for long when they constantly have these losses.
Be Aware of Your Cash Flow
Although all of the above are important, you can’t forget just how vital cash flow is to your business. When you know how much cash flow your company has, you will know the overall funds that your business has available.
Having this information on hand will help to make it easier for you to make decisions about your company including purchases that you are making, discounts you are offering, etc. If you aren’t aware of your cash flow and you aren’t managing it properly, it could cause problems in your business before you know it.
You need to have regular cash flow statements that provide you with the actual amount of cash available in a given month. You can’t simply assume that your cash flow will be the same from one month to the next since there are so many factors that could affect your sales or the money that’s flowing into your business. Always check the most recent, accurate cash flow statement before making any decisions.
Knowing Your Cash Flow Helps to Ensure Better Business Relationships
If you aren’t aware of your cash flow and you are having money issues, you might not have the money needed to pay your bills. This might mean that you aren’t able to pay your suppliers what they are owed. You might not have enough money to pay your freelancers. If this happens, it can ruin your relationships with them and make it more difficult for you to get the products or services you need. It could also potentially ruin your reputation.
Keep track of your cash flow and be sure to have payment schedules and reminders for all of your bills. This will reduce the risk of not paying them on time.
See Where the Money is Being Spent
Another one of the reasons it is important to keep an eye on your cash flow is so you can know where your money is being spent. You will know where your money is going, why it’s being spent, and how much is being spent. You need to know where your money is going each month, whether it’s for recurring expenses or one-time expenses, and so forth. When you have a better understanding of not only the cash flow but also where the money is going, it could show you some areas where you can cut costs.
You Will Know When You Can Expand
Another reason to watch the cash flow is that it can give you a good indicator of when you can grow your business. You don’t want to jump the gun and try to expand too soon. As you know, growing the business requires a lot of cash for things like bringing on more employees, buying stock, renting spaces, buying equipment, etc. If you don’t have enough money coming into your business, you won’t be able to expand without putting your business at risk.
When you watch your cash flow carefully, you will know how much money is available and whether it will be a good idea for you to expand your business or not. It could save you from making a big mistake.
As you can see, knowing and watching your business’s cash flow is essential. Make it a point to utilize the right techniques and tools that can help to make it easier for you to manage your cash flow.