When you start a business the last thing most small business people want to get involved in is the technical side of running the business. They would much rather be involved in doing what they like doing best: baking bread and pies if they’re a baker; fixing electrical problems if they’re an electrician; repairing cars if they’re a mechanic.
Few small business people ever want to get involved in bookkeeping, doing accounts, chasing up people who might owe them money and basically managing their cash flow … but that’s one of the most important jobs there is because it’s the one that keeps your business alive. Pay no attention to your cash flow and your business will soon die.
What is cash flow?
So what is cash flow? Well if you search Google you will find plenty of very technical definitions of cash flow but basically cash flow is keeping the money coming into your business in a regular and steady stream. You can think of it as a river that flows steadily and keeps the countryside on either side of the river healthy and alive.
When droughts come and the river dries up the country along the river becomes parched and the plants and trees struggle to survive. And so it is with cash flow: when the cash is flowing into your business in a steady stream your business will survive and grow but if it reduces to a trickle then your business is going to struggle to survive.
Keeping your cash flowing
There are two factors that you need to watch carefully to ensure that your cash flow continues and never reduces to a trickle.
The first thing you need to do is to ensure that there is always paying work or customers coming into your business. You have to spend time advertising your business and chasing new work because if you don’t your cash flow won’t resemble a river at all. Instead it will look like a dry creek bed in arid country that only flows after the occasional downpour.
The other thing you need to do is to keep tight control on your accounts and never let people run up accounts that they have no hope of paying. Payment in advance or payment on completion along with progress payments is far better for you than payment in 30, 60 or ninety days.
Managing your cash flow
Income is only one half of the cash flow story … paying your bills is the other half and so many small businesses people get into trouble and can’t pay their accounts because they don’t watch their cash flow and don’t know when regular dry spells are coming.
Just as most rivers have seasonal highs and lows the cash flow for most small businesses will have regular peaks and troughs depending on the time of year. Knowing when those peaks and troughs will come is important so that you’re prepared for those times when your income will be down.
If you’re serious about having your business survive and grow then you need to focus on your cash flow. You need to ensure that work will keep on coming in as a steady flow rather than a short flood and you need to keep control of your accounts and not let overdue accounts turn into bad debts that will destroy your business.
