Fashion Business Start Ups – Tip number 10 – The importance of cash flow.
What is ‘Cash Flow’? According to Investopedia.com “Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.”
Controlling cash flow is of vital importance to the health of a business. Not having cash can keep you up at night.
Think of ‘cash flow’ as a snap shot of your business checking account. If more money is coming in than is going out, you are in “positive cash flow” position which allows you to pay your bills. If more cash is going out than coming in, you are in danger of not being able to pay your bills and the creditors come calling. This is why start up businesses benefit from having money set aside in advance to covering the operating costs throughout the year. This can be in the form of a bank line of credit or the money you invest in your business.
What is important to note is how cash flow effects your business? For example: You have to pay for your production months before stores pay for what you ship them. If you are not prepared for this you end up being in a negative cash position. You might find you cannot even afford to buy your production which could put you out of business.
I have a client who has so much difficulty managing cash flow that it impacts his profitability in so many ways. He doesn’t pay his employees on time which causes resentment. He bounces checks which costs him in fees and overdraft charges. He can’t buy the inventory he needs which costs him sales.
Managing your cash levels well will insure that when you need to spend money the money is there. Even if your profit and loss statement shows you will be profitable by the years end, you still must have the cash at the different times through the year when you need it.
Maintaining a positive cashflow is the number one rule of thumb in business. I am not speaking about this from an accounting point of view but true cash in and cash out on a daily basis. A business cannot meet its obligations if the money isn’t there.
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