Whether you’ve already started your small business or whether you’re just thinking of launching your next great idea, you probably know by now that you should create a business plan. You may not have considered, however, something equally important.
A cash flow statement.
Simply put, a cash flow statement lets you know how viable your operations are. It describes how much cash you currently have on hand and where it’s coming from – whether it’s your current sales, your savings, loans or any other source of income. It also details where all your money is going. This might sound similar to a business plan but there is one crucial difference.
Cash-flow doesn’t count a sale until you’ve been paid and it doesn’t count a bill until you’ve paid it. It’s not the amount of money you owe or are owed on paper – it’s the amount of cold, hard cash in your bank that matters.
If you’re already in business, you’ll have been keeping track of all this information. But even if you haven’t started your business, it’s important to know where your money will be going each month. You can do some research based on businesses that are similar to your own idea and extrapolate from that data. How much would you pay in rent? How much will you be paying in taxes? How much equipment will you need to buy?
For current business owners, once you’ve got a good idea of where the money goes, you’ll know whether or not your business is in the red. You’ll be able to properly plan for the next quarter, or the next year.
If you haven’t started your business yet, you’ll know whether or not going ahead with your business idea is even viable. You need to be able to pay your bills, after all.
Businesses also need to create income statements, which are similar to cash flow statements. There are different in one important way – an income statement takes into account the value of non-cash items – like depreciation. For now, the main thing to understand and project is exactly how much cash will available to you when you go to pay your bills six months from now.
Cash flow statement are usually divided into three sections: Financing cash, Investing cash and Operations cash.
Cash from financing is how you originally pay for your small business. This money, whether it comes from yourself or whether you borrow from others, is how your business is “financed.” This is how you know the amount of cash you have on hand.
Cash from investing is where you ‘invest’ your initial financing money. For example, buying equipment for your business. Cash from operations is all the money spent actually operating your business – rent, salaries, taxes, etc. These two parts of your cash flow statement show you where the money goes.
You don’t want to forget this one important fact – you may be worth more on paper, but that doesn’t help you when it’s time to pay your electric bill! You need to know exactly much money you have in your hand to take care of all your expenses.
Cash flow statements are important and intelligent investors will want to see one before they finance your business adventure. Perhaps more importantly, they will get you into the mindset you need to be in – cash is king, guard it well.
Remember to collect all the money your owed at the very start of the month and only pay your bills at the very end. This will help you ensure you have the cash on hand when you need it.
If you’re already in business, do it now! If you’ve yet to start a business, it should be one of the very first things you do as an aspiring small business owner.