Cashflow is like oxygen to a business. Without it, a business dies. To plan for this, entrepreneurs create cash flow projections. There is a need for every business owner to know how much money will be coming in and when.
A cash flow crunch is not always the result of bad planning. All businesses have business cycles–some can be planned for, while others cannot. Historical data is useful in predicting future trends, but what occurred in the past may never happen again in the future. Things can also change considerably from year to year. You can have a boom during one year and a bust in another year.
Some trends, however, are predictable. For instance, people tend to purchase more hot beverages in winter. These trends can be easily planned for. Other trends cannot be predicted till they arise. It is then that a business’ ability to adapt to changing trends that is tested.
While getting a loan can be an option for dealing with a cash crunch, it is only worth doing if a business knows that it will be able to solve the cash flow problem in the near future.
In business, the name of the game is to make a profit so that you can stay in business. As a concept, profit is the difference between what it costs you to buy or create your product and what you earn from selling it. Knowing your markup is critical to establishing at what price point your business is profitable. Selecting the right price is often the key factor between success and failure.
There are three simple ways to increase profit. Sell more, increase prices or reduce costs. You will, of course, have to figure out the details. But once the big picture has been factored in, the details do tend to fall into place.
A cash flow problem is one that every business will encounter during certain periods. Having a business that is not profitable at all is a different ballgame altogether. A business owner must identify the key areas of the business that are profitable and ensure that the cash flow for those areas remains in good shape.
To ensure a business’ success, mastering the fundamentals of cash flow is to know that it is not the same as mastering profitability. There is a difference. Solving a cash flow problem is not rocket science. It all comes down to the magic of numbers.