Fundamentals of Business
Beginning with this article, I am starting a Fundamentals of Business blog. I will be writing short articles for new small business owners, and I also hope more seasoned owners will find the reminders helpful. These fundamentals apply to all businesses and will be true regardless of the economy or phase of the business cycle.
Cash is the lifeblood of every business. Without it, a business will fail. Bills will not get paid on time, and employees will quit if their paychecks are late. It is critically important for businesses to have enough cash and to properly monitor it. So… what are the steps to do this?
Step 1: Get it
Businesses need cash to get started. This will typically be the owner’s own money, loans from family and friends, or a loan from a bank. Larger businesses may even start out with a group of investors contributing the initial funds.
How much money is needed will be determined by the initial business plan including the budget. The importance of a budget cannot be overstated as it provides a map for the road ahead and the peaks and valleys of cash flow. Businesses should have access to additional cash reserves or other financing because the startup budget usually underestimates some costs.
Step 2: Watch it
Monitoring your cash flow is much more than looking at the bank account balance. Businesses can run cash flow reports from their bookkeeping software such as QuickBooks, and this is a standard report in any software.
The report will help to identify what is happening with cash. In most cases, cash increases and decreases are a result of operations (i.e. the income statement) such as receiving income and paying for expenses. Cash can also increase or decrease due to slow customer collections, debt, investments in long-term assets such as equipment and buildings, or distributions to the owners.
Step 3: Make decisions
An owner will need to make decisions to align cash flow with the long-term plans of the business by speeding up cash received, slowing down cash spent, or getting new cash from investors or a bank.
For example, a business may need to replace an old piece of equipment at the end of the year. Can this be paid for with existing cash? If so, does spending this money impact the business’ ability to pay for other expenses such as payroll? Should the business consider taking out a loan? The answers to these questions and the resulting decision should be made well in advance of making the purchase so there is no disruption to the business’ operations.
In the end, a business must have enough cash to operate efficiently and be in control of its future. Otherwise, the business’ decisions will be at the mercy of how much money is in the bank account, and this is a dangerous place to be.
Spectrum Small Business Advisors is here to help. Contact James Gargiulo at (949) 351-1538 or James@SpectrumSBA.com for assistance with your business.