Signs of Problems and Tips for Improvement
If income is the purpose of business, cash-flow is the lifeblood. As a business owner, you know how important cash-flow is to your business. Without cash, you can’t pay your bills, your employees or purchase the goods that you will sell. And if you can’t pay your bills, it doesn’t matter how much money you are making on paper, your business is in big trouble. Without cash-flow, your business runs the risk of becoming insolvent.
Accordingly, as a business owner it is imperative that you understand the inflows and outflows of cash and how they can affect your organization. Let’s take a closer look at just how business cash-flow works. Cash is generated into a business through sale of your products or services, loans or owner investments, or asset sales. Cash flows out of a business through business expenditures, loan principal payments, asset purchases and owner withdrawals. These cash inflows and outflows can be categorized into three main categories: investment cash-flow, financing cash-flow and operations cash-flow.
First and foremost, you need to generate enough cash into your business to satisfy your immediate obligations. During different times during the life of your business, you may generate the cash that you need in different proportions from the three categories above. At startup, you might generate cash-flow from financing, whether debt or equity. Over time though, you must generate the majority of your cash-flow from operating activities - that is the sale of your products or services. Operational cash-flow is critical for the long term success of your business. Unless you are a technology startup eyeing a VC investment or acquisition, investing and financing aren’t viable ways to manage and grow your business long-term.... Read More
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