Every business needs to have/received a sustainable amount of money which the business in return spends/invests daily to operate the business. Cash flow refers to the spending and receiving of cash within the business. In this blog I want to shortly introduce 3 ways every small business can maintain a healthy cash flow and what you must know about cash.
According to Wikipedia, A cash flow is a real or virtual movement of money. Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business. Cash received represents inflows, while money spent represents outflows.
Trying to survive and you say cash flow
I started my first business at a very young age of 16 out of necessity. When my parents separated and I was sent on the streets to find a life, it was only about surviving. So for me at that time, things like cash flow made no sense. So I get you when you might be trying to survive and we are talking of cash flow. However, I quickly came to realise that I want to thrive. I choose to thrive. To go beyond surviving to actually living a life where I can thrive. One major shift that happened was to reorganise my approach to managing all the entrepreneurial activities I carried out. I began to take theories that I could apply into my everyday practice. Cash flow was one of them and here is how I used it.
Monitor the cash flow by recording
By developing what experts would call a cash flow statement, you can have first hand insight about the health of your business. Since cash flow reflects the current state of your business, it will be wise to continually update your cash flow records and this is a simple basic way to go about it. Consider these 3 key aspects of your business:
- Regular business activities which you could label operating activities. Here you record the inflow of money you make from your products and/or services. Also add any money like interest you receive. Then record the money you spend paying for stuff like overheads, taxes, purchases of raw materials, salaries, suppliers and any money you give out.
- The second aspect might not be very relevant for now as a startup entrepreneur. But if you already have started and you have properties or equipment (large equipment that cost much and last years) to sell or acquire, then consider these investment activities and record them. Here you can also record non-current assets or other financial assets like bonds and stock you buy or sell for your business.
- Then the last key aspect is to keep track of the major financial activities that help you start, build or expand your business. We can label these financial activities like if you receive or payback loans from banks, investors, friends and others. Or you sell or buy back shares (parts) of your company from shareholders and such.
Spend only what you have
Do not spend more than the cash you have. Through consistent records of your expenses, you will have a clear oversight about the current amount you have which is called your liquidity. Liquidity refers to one’s ability to pay the obligation as soon as it becomes due. You can even apply these strategies to your personal life. Cash Flow is not the money you have in your savings account or a promise from a customer. It is about the money in your current account or on your hand as cash.
It isn’t the monetary value of the product in stock. No! I know that these products cost money but they have not been sold. Therefore, they have not yet generated money into your cash flow. Even those people promising to pay tomorrow, are not money in hand. So it is wise to know what you have and how to disseminate spending. Do not borrow or lend or take things on credit to spend on things that depreciate in value based on your expectations of money. This guiding principle will help you build a healthy business.
Regulate your fixed cost and variable cost from the start and consistently.
From the beginning consider fixed costs. Fixed costs can be considered indirect costs or overhead costs. They are business expenses that are not dependent on the level of goods or services produced by the business. These kind of costs tend to be recurring, such as interest or rents being paid per month. (Wikipedia). Unlike variable cost which changes as the quantity of the good or service that your business produces changes, fixed cost can sometimes ruin businesses.
During the pandemic for example, restaurants that were not allowed to open up for 15 months still had to pay rent. Rent is fixed costs. But they did not need to buy vegetables to cook since they were not cooking. Vegetables are variable costs. So you see, list out all your fixed or proposed fixed costs and try to set them to the minimum you need to start or run your business.
Advantages of consistent cash flow check
The advantages of using these strategies is that you get to know from which product and/or service you make more money. Maintaining a healthy cash flow helps you build credibility for your entrepreneurship journey and makes it even more feasible to get capital to expand your idea. This was a real technical blog article, but we at Joadre believe that every entrepreneur, no matter where you are or if you have access to education, there are some basics you have to understand to be able to navigate in this our economic system for today.
I hope we could break this much needed knowledge down for you in the article. Please help us to grow our platform. We want to reach students and upcoming entrepreneurs in Africa. Help us by sharing this blog article on your social media platform. Help us by commenting beneath. Thank you so much and go check out the videos on our YouTube Channel. If you don’t want to miss out on our updates, subscribe to our newsletter. We will release our Joadre community app this year, so sign up on your waiting list to be one of our first users. Thank you for reading.