Cash Management Basics
The cycle of spending and earning cash is what fuels the business world. Every business, large and small, ultimately runs on the positive movement of cash. So, if you’re beginning your own business, it’s important to understand how the cash system works and how you can use it to keep your business going strong. Here, we’ve explained a few ideas about the management of your cash flow.
What Is Cash Flow?
Defined most simply, cash flow is the movement of cash into and out of your small business. It’s the core of your success. To be consistently successful, you not only need to keep track of cash flows, but you should also compare them frequently in order to project your future cash needs. Cash flow predictions allow you to anticipate the greater need for income before your financial situation poses a serious risk to your business’s longevity.
How Does Cash Flow Work?
In order to start evaluating your cash flow, you need to know the essentials of cash movement as it applies to your business. During the lifetime of your business, each of your cash movements will be classified under one of the three following categories:
- Operating Transactions. As the name implies, operating transactions involve the successful sale of your service or product, or the expenses related to your everyday business operations.
- Financing Transactions. Financing transactions describe money invested in and withdrawn from the business by the owner. These transactions can include the lines of credit, credit cards, loans, and mortgages taken out in the business’s name to help finance the company.
- Investing Transactions. Investing transactions describe the buying and selling of fixed assets. Fixed assets include facilities, the property, and other major equipment owned by your company.
Operating transactions are the primary source of income for most organizations, as selling is the heart of business. As for expenses, there are two main ways that a small business spends cash: on fixed costs and on variable costs.
- Fixed costs are always present. They must be anticipated and planned for in order for business to continue. Examples are facility rentals, utility bills, employee wages, and interest paid on loans or credit cards.
- Variable costs are expenses that you can control, and that can be cut if necessary to preserve a positive cash flow. Items like office supplies, temporary help, cleaning supplies, food, furniture, and other equipment are all variable costs. It’s best to have more money in variable costs than fixed costs because variable costs allow you to manage your expenses more freely.
How Do You Monitor Cash Flow?
You can easily project your cash flow by simply tallying up your anticipated income, adding it to your starting cash for the month, and then subtracting your anticipated expenses. It’s best to be modest and realistic when estimating your income and a bit more generous when anticipating expenses, just in case. If you need help, you may want to consider the use of small business accounting software or a Certified Public Accountant (CPA) to set up a cash flow control sheet for you. Popular accounting software titles can be found online or at your local computer or office supply outlet. And, if you’d like to know more about Choosing a CPA, we can help.
Have more questions? We’ve got you covered. Take a look at our next section, where we‘ll explain Venture Capital and how it may be able to help your big idea grow.
