This is really the ‘no fun’ part of running your own home business. Once
you’ve secured a loan and are ready to begin, you need to plan for how you
are going to manage these funds. You may have already decided upon a
system via the loan proposal that you submitted, but there’s no harm in
learning the specifics.
There are two different terms that are sometimes used interchangeably, but
should be defined in separate terms. First is the term ‘cash.’ This is the
money that you have right now to work on your business. It is easy to get to
and it’s just sitting there waiting. On the other hand ‘cash flow’ is the money
as it moves in and out of your business.
A good thing to note is that ‘cash’ is not necessarily the profits that you are
making. Profits are expected, but not guaranteed necessarily. You have to
look at what you actually have, rather than what you hope to have.
Cash flow is the money that you have to watch each month. It includes both
the expenses that you have along with the income that you make. This is an
important area to watch rather than what kind of money you have at any
given time. You wouldn’t just look at your checkbook to see if you have
enough money for groceries and then buy some if you do, you would make
sure that more money was coming in, or was expected to come in, right?
To separate cash flow even further, you will look at the positive and the
negative sides. Positive cash flow is good; it means that you are making
more money than you are paying out. And while this is a sign that your
business is doing well, it’s not the only sign.
Negative cash flow is an indication of a problem. It means that you are
spending more than you are making and this could be the beginning of a
disaster if you’re not paying attention. If you’re not able to borrow any more
money to help during this slow time, this is a problem.
But this is just the tip of the iceberg for financial education and your small
business. You need to be vigilant about your numbers in order to maintain
your success as well as your sanity.
CASH FLOW AND MANAGING IT
Let’s talk for a minute about the ins and outs of cash flow.
There are three basic components to cash flow. First you will need to
consider operating cash flow. This is also known as working capital. This is
what you make when you sell a product or a service. This is where you will
see your profits begin, though it is not the only way that you can make your
money grow. This is also the area that is most under your control because
you can see it on a daily basis.
The next area is your financing cash flow. This is the money that you have
made from the loan that you have taken out. So, in a sense, this is not your
money. This is also considered to be money that you are paying to repay
your loan or other financing options. And while you need to watch this
process, it is fairly static.
And lastly is your investing cash flow. This is generated from your
investments—as the name denotes. This might be caused by machines or
equipment that you have invested in to other non-operating costs. You may
also have investing cash flow through outside sources of income.
But the main point of watching your cash flow is to protect the financial
health of your business. And in order to do so, you will need to aware at all
times of what you are spending and what you are making. Each month you
should be keeping a detailed report of the ins and outs of your financials and
make decisions based upon it.
This is where your organization skills will be tested as well as your stomach.
First of all, you’ll need to know when you’re going to need money and where
you’re going to get it from. Think of it as your household bills and knowing
when they need to be paid off. Keep a calendar or some sort of record of the
expenses so that you are aware when you will need to be making profits to
cover them, or at least have a motivator to make those profits.
As for your stomach, watching the money flow out of your business can be
painful to watch, especially in the beginning, but not knowing that you are
headed into trouble can be even worse. You want to make sure that you are
watching and learning from each month, rather than burying your head in
the sand until there is a major financial problem.
That said, you will want to start considering maintaining good relationships
with your lenders (paying them on time!) as well as other possible sources of
revenue should your profits fall during a month. Create a plan for your cash
flow and you will find that your business will find a way to keep up with your