Cold Hard Cash Flow

Cold, Hard Cash(Flow)

Many times as entrepreneurs we tend to look past the finer details of running a business and focus more on the big picture concept. We are more concerned with how to bring our idea to market, how to increase sales, how to innovate and create change rather than managing the day to day operations of the business. Unfortunately this ultimately may lead to bankruptcy no matter how great the product or service may be.

Business analysts show that poor management is a leading cause of business failure. More specifically you could argue that poor cash management is a leading cause of business failure. For many entrepreneurs, the concept of cash flow is either drastically misunderstood, completely undervalued, or both. So it's time to set the record straight. What is cash flow, why is it so important, and what can be done to ensure proper cash flow management?

What is Cash Flow?

Simply put cash flow is the amount of money coming into your business versus the amount of money going out. Cash inflow includes cash you receive from customers, lenders, and investors. Cash outflow is cash what you use each month to pay salaries, suppliers, and creditors. Important to realize is that cash inflow does not include income from a credit sale of products or income that is due but has not been received.

Positive cash flow occurs when your cash inflow is greater than your cash outflow. Positive cash flow can be a good sign (but not the only sign) of good financial standing of the business. Negative cash flow is when your cash outflow exceeds your inflow. This could occur when revenue from a sale is not received for a period of time, for instance when goods are sold on customer credit. Even though the sale has been made, your business may not collect the payment (cash) for another month. All the meanwhile you have already paid for the cost of goods sold, utilities, loan payment, etc.. Again, this creates a negative cash flow. A negative cash flow could mean that you cannot pay your expenses (bills and wages) for that month.

Cash Flow vs. Profit

Many entrepreneurs and small business people have a difficult time differentiating between cash flow and profit. When you first begin working on a business plan you typically think in terms of profit. Sales minus expenses = PROFIT. It's that simple. But here is the catch, you don't spend profits, you spend cash. Profit is income minus expenses at a certain point in time. Cash is ready money. Cash flow looks at the time at which the movement of the money takes place. Inventory, property and most importantly accounts receivable are not considered cash (although these items can be converted into cash).

Possibly the most important concept to remember is that a profitable company can still go bankrupt if cash flow is not properly managed.

Managing Cash Flow

There are few things that can be done to ensure good cash flow management. First you must develop a cash flow projection. This can be done using an Excel spreadsheet (here is a template). It's a good idea to create both short term (weekly, monthly) and long term (annual) projections. By using a cash flow spreadsheet you will be able to anticipate cash insufficiencies ahead of time and make proper adjustments accordingly to keep the business afloat. If you are able to foresee a period of negative cash flow you can amend your business plan or possibly seek additional funding to cover costs.

No one ever said properly managing the accounting and finance aspects of your business would be fun. It's definitely not the "sexy" part of running a company. However, these day to day management objectives are vital to staying in business, especially in a so-called down economy.

Article Source: http://www.articlesbase.com/entrepreneurship-articles/cold-hard-cashflow-3121701.html

I am not a successful billionaire entrepreneur. I have not started the next Microsoft, invented the next breakthrough consumer product, or sold my business for a ridiculous gain. I am not a business expert by any means.

I am probably very much like you. A young, ambitious entrepreneur with a great interest in business, adventure, and living life to the fullest who is anxious to make his or her mark on the world. I am writing this blog as a source of information, inspiration, and entertainment for similar people to myself as we take the plunge into and entrepreneurial life.

Hope you enjoy,

Jake Adams

www.ENTREPRENANT.us