One of the most important concepts when it comes to your business is cash flow. At its most basic definition, cash flow is the total amount of money being transferred into and out of a business. In other words, it’s the money that keeps flowing through the business to make sure the lights stay on and you’re getting paid. Can you see why keeping track of cash flow might be a good idea?
Cash flow is the measurement of money coming and going out of the business. The money coming in includes things like clients paying you for work, customers buying your products, affiliate commissions you receive for promoting other people’s products, advertising revenue, residual income for books you’ve written, rent for property you own and rent out, interest earned on interest bearing accounts etc. Think of all this money flowing into a bucket.
On the other side, money also comes out of the bucket to cover your expenses and your salary. The phone bill you pay every month, the virtual assistant you hired, the business course you just signed up for, the office you’re renting, the new computer you just ordered all come out of company funds. As a business owner it is your responsibility to make sure those expenses are covered.
Your cash flow goal should always be to have some sort of a balance between money coming in and going out. You don’t want to continually spend more than you have coming in. Your “bucket” would run dry quickly, putting you out of business. At the same time, you don’t want a bunch of money just sitting in your company. It doesn’t do you much good there. Yes, you want a bit of a safety cushion to help you through some lean months, but as a general rule, you want to either reinvest your profit, or take it out to pay yourself.
Cash flow is a money management tool for you, as well as an indicator of how well your company is doing. It also helps you plan what you can spend down to the road to expand your business, upgrade equipment or give yourself a raise. If you’re not already keeping track of this vital measurement, now is the time to start doing so. It’s a powerful tool to have in your belt and one of the best ways to make sure your business stays viable and profitable for years to come.
Randy Bett is the author of three books – 7 Secrets of Real Estate Investing, Investing in Real Estate Sucks Unless… and The Value Driven Approach To Sell Real Estate.
He is also a retired high school teacher and former Saskatchewan farm kid. He now writes, speaks and coaches full time. He is happily married and has 2 children and 2 grandaughters. He lives in Red Deer, Alberta.