According to the U.S. Small Business Administration, around 95% of businesses nationwide close their doors within 5 years of being operation. If that isn’t alarming enough, 50% of these businesses won’t even pass the year mark. What’s the culprit behind the demise of these small businesses? While I am sure there are a number of excuses, most boil down to a single obstacle — money management. If you’re a business owner, you have probably seen a balance sheet and income statement, but are you keeping tabs on cash flow? If not, your likelihood of success dramatically decreases.
What is Cash Flow?
Cash flow is simply defined as the money going into and out of a business. Per this definition, every venture is subject to cash flow. As a business owner it is imperative that your are aware of where money is being spent, when it is being received, and how much you have on hand. All of this is done to ensure that company reserves are either stacking up or being reinvested into growing the business. When money is properly managed, cash flow is positive. When funds are poorly managed, cash flow will assuredly be negative.
How Do I Know if My Cash Flow is Positive?
A basic understanding of accounting can help determine if your cash flow is in the green. First, locate the amount of money you had available at the beginning of the current period. Second, find out how much cash is presently at your disposal. Once you know these two numbers, see if there is a difference. A positive cash flow will result in your current balance being the larger number of the two.
What if My Cash Flow is Negative?
If a calculation of cash flow shows that you have less money now than when you started, do not panic. There are a number of remedies readily available. Some of the obvious ways to drive income include selling more goods/services, selling an asset, reducing company costs, or increasing the cost of your product. If none of these options will do, there are others from which to choose, including: a faster collection process, taking longer to pay creditors, or financial solutions tailored to small businesses.
While cash flow can be a solid indicator as to whether or not a business is performing well, it can’t assure its fate. However, being profitable takes a lot off of your plate as an owner. The surplus of cash can be used to expand, or help the company survive during hard times. On the other end of the spectrum, knowing that you lack working capital can force positive changes to business procedures before it is too late to make a difference. As an entrepreneur, remember these words, “Cash is king.” The more you have at your disposal, the better chance you have of surviving the small business killer.