Cash Flow Explained for a New Business Owner
If you’re starting a new business, you may be encouraged when you see a lot sales. A common mistake of first-time business owners is focusing on income more than expenses. When this happens, it’s not unusual for more money to start flowing out than you are bringing in. You must look at overall cash flow to get a clearer picture of how your business is faring financially. Here is some basic knowledge about what this term entails.
Every business has inflows and outflows. Inflows include the money you make when you sell your products or services as well as the assets that you can turn into cash quickly. Outflows include every penny your business pays out, whether in operating expenses or investments.
Cash flow is a combination of the two. It includes not only the money that comes in but also the payments that go out. It’s a great measure of whether your business is able to sustain itself by covering all its bills with the revenue it generates. You want your flow to remain mostly positive, but a negative flow doesn’t automatically spell doom. For example, you are likely to be spending more than you are making during times of expansion. The sooner you can starting earning more than you spend, however, the better.
When calculating cash flow, it’s important to take into account both recurring and one-time influxes and expenses. Recurring income includes steady sources of money, such as membership fees. Recurring expenses are easily predictable costs, such as the rent payment. Cash can flow positively or negatively in a single instance, too. If you sell or buy a piece of equipment, it’s a one-time transaction.
To keep track of the financial health of your company, you should start with profit and loss statement, which stacks revenue against cost to see if you’re making a profit, and your balance sheet, which compares your debt to all the assets you own that could help pay it. You use the information in both these financial statements to create a cash flow statement. It combines information about daily exchanges, investments and expenses to show the pattern of the flow of cash in your organization.
This information is important because it can be used to identify financial strengths and weaknesses. By knowing how much money you have flowing in compared to how much you have flowing out, you can identify problems and resolve them before they get out of hand.