Do You Know Your Company’s Cash Flow?
A fundamental concept in business is the difference between profits and cash flow. It’s entirely possible that a company is profitable but lacks the on-hand cash to make purchases and continue its growth. It’s just as likely that a company with high liquidity may find itself struggling when the off-season hits. In fact, when a business is seasonal- think ice cream shops or amusement parks in cold climates who only operate in the summer – the influx of cash can be even harder to predict and manage.
As with all things, though, knowledge is power. Following good accounting principles and instilling responsible financial controls can help any business succeed.
Forecasting isn’t just something meteorologists do; it’s a necessary component to understanding a company’s financial health. Forecasting is merely a way or predicting future behavior, in this case, the amount of revenue and costs in both the short- and long-term.
Knowing when a business is cash flow positive lets them know when to make that big, but necessary investment equipment, staff, or infrastructure. Without forecasting, it’s almost impossible to know how much revenue a company may receive in the future or even how much money they have right now.
An entrepreneur wears many hats, so it’s forgivable if they don’t have expert-level knowledge in all areas of their business. Finance and accounting are two places where small business owners often struggle. So one way to gain the necessary insights is to hire someone who knows what they’re talking about when it comes to money.
Good hiring can lessen the stress of an entrepreneur who’s struggling to run his or her company’s operations, product, and financial teams. If hiring a new employee is out of the question, perhaps due to not knowing if they can afford to hire someone, there are third party financial consultants and freelance accountants who can help provide answers, too.
Another way to offset cash flow problems, especially for a seasonal business, is to diversify the product or service offerings of the company. That ice cream shop in Rhode Island that struggles to pull in customers once autumn hits could also offer sandwiches or soups to help steady revenue spikes and drops. Even a service-oriented business, like a wedding DJ rental company, could focus on school or corporate events throughout the year to keep business regular.
Managing a business is tough, and it’s made even tougher if its financial health is unknown. However, a little knowledge can save even the most prominent companies, along with stable cash flow practices like forecasting costs and revenue, hiring the right people, and a diverse offering of products and services.