Many small business owners fall into the trap of living on the loose cord by using the cash flow and not the profits of their business. When the checking account has a healthy balance as deposits keep rolling, and business seems to be moving ahead, you may be tempted to allow yourself a raise!
Using the cash flow and not the profits to live on is a very common mistake. In most businesses there is a daily flow of cash that is at your disposal for a short period of time. Cash is not profit so you must keep the temptation away from "borrowing" from your won source of income.
If you follow the mirage of your future sales projections and instead of paying your bills on time, you start putting off one obligation in other to meet another; you will fall into a dangerous cycle. By letting your bill note slide one week here and the other following week, you create a false sense of rationalization and well being. Once this pattern is established it will snowball into a situation so treacherous the only way out is to borrow money to keep afloat. Borrowing money to buy assets that can increase revenues is one thing, but borrowing to pay debts is a definitive NO, NO.
Follow these practical steps on how to allocate your cash flow correctly:
· Start up business, set aside 4 moths of operating budget before you open. If the sales projections are not met, the reserve funds will be available until corrections take place. If the sun shines and sales projections are not a problem, you will have a surplus for rainy days. · A detailed cash flow analysis must be made that shows anticipated fluctuations of revenues.
· Do not use all your profits. You must have a reserve for any "unforeseen expenses", like the slowing down of the economy, replacement of any equipment, etc.
· Have your plans for cash flow. This way you will be able to determine if sufficient funds are available from financing activities. Using and adjusting the information gained from this cash flow analysis will help you in advance if there will be enough cash to pay:
- Supplier bills - Interest - Dividends - Expanding your business - Developing a purchasing plan
Careful planning will ensure a sufficient amount of cash to meet future obligations on schedule, which is essential for the successful business. Just remember not to open your cash drawer for your personal expenses.
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