Running a small business can be far more expensive than first-time entrepreneurs expect. However, expenses alone — even substantial ones — don’t necessarily mean you’re doing anything wrong. Your real measure of financial health should be your cash flow. This isn’t just a measure of how much money is coming in and out of your business, but also where it’s going, where it’s coming from, and what it’s doing for you along the way.
This article will help you understand your cash flow better, learn how to measure its health, and improve it when necessary. Let’s get started.
Assess Your Spending
The first step you need to take to evaluate your cash flow is to make sure you have a full account of what you’re spending and why. Often business owners, especially first-timers, wind up overspending on things they don’t truly need. In truth, figuring out whether a particular investment is worth it may be a matter of trial and error. However, you cannot properly evaluate those trials without great notes and a solid accounting system.
Tracking your spending can also help assess the pros and cons of business choices that come up along the way. For example, this info will come in handy when it comes time to decide what kind of business structure you’d like to use. Some businesses will need to create an LLC or formalized partnership structure, but for others, a sole proprietorship can be an easy and inexpensive option for improving cash flow.
Take a Look at Income Sources
Many business owners are pleased to see they have cash coming in, and don’t look any further into that part of their budget. However, this can be just as important as cash going out. If your goal is to become a self-sustaining business, then you need to work toward a point where all of your income is from sales. Starting off, however, it’s perfectly normal to depend on loans and other sources of funding to get off the ground.
That said, it’s important to make sure you’re protecting yourself properly during that early funding stage. Be sure to have a legal team on hand who can help you evaluate funding opportunities and make sure the terms are fair. It’s easy to wind up in a tricky spot with a predatory funder. Bad-faith investors know to look for new business owners who may not have the information needed to spot a bad deal. With a strong legal team on your side, however, you can enter into funding agreements with confidence and pay them back as your business grows.
What Is Your Money Doing?
Once you have a good sense of where your money is going and coming from, you can start to assess whether it’s really working for your business. For example, if you invest in a marketing team and find, after a period of time, you’re getting more new business, you can feel good about that expenditure. If, however, you don’t see a real return on your bottom line, you can use that as a sign that something in your marketing efforts needs to change.
This, at the end of the day, is the main benefit of measuring cash flow — it allows you to stay aware and adapt your business when necessary. There are no simple solutions or one-size-fits-all answers, but these techniques can give you the information you need to craft an effective plan so that your business can flourish.