Cash flow is the measurement of how much money goes in and out of your business in a certain period of time – often measured quarterly. Cash flow goes beyond regular income and even includes loans depositing into your account.
Cash flow breaks down into two types: negative and positive. Positive cash flow is when you have more money coming in than your expenses or financial obligations. Negative cash flow is when you don’t have enough money coming in to cover expenses or financial obligations – essentially missing payments. A lack of cash flow can kill a quality business even when both products and services are great.
Successfully managing and understanding how cash flow affects your business can take years to lay out. Even in the past two years, there are more lessons learned about cash flow and how it affects the survival of your business. Here’s what you need to know:
Did you know that your business is possibly only 1-2 months away from going out of business? Your business is closed once you’ve run out of cash – and what happens if you experience a negative cash flow for the next two months? Will your savings cover your expenses? Will your account be emptied if you miss a payment or default on a loan? These are all things to consider when planning for your business financially.
A cash reserve refers to the money a company or individual keeps on hand in case of emergencies or short-term financial need. Cash reserves are kept for when you experience negative cash flow and need to pull to prevent going out of business. We recommend a cash reserve of 10%-30% for your business.
More focus needs to be on using SWOT analysis to determine potential threats – and prevent instances of negative cash flow. While the Government can help with loans and such with catastrophic losses – even their help might not be enough. Innovative change management and technology has changed so many businesses may not return to business as usual under those circumstances.
Definition: SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is typically used by businesses to measure and evaluate their performance vs. their competitors objectively.
Connect with the ModVentures team to determine what type of preparation your business should be doing in order to properly manage your cash flow.