The Importance of Money Management for Entrepreneurs
According to most business analysts. poor money management is one of the biggest stumbling blocks for entrepreneurs. Having a basic understanding of the importance of money management will help you prepare for the unexpected.
Cash Flow vs. Cash
The cash a business has is the money it has in the bank or at the workplace. Cash is not accounts receivable, or inventory, or property. These things can be turned into cash, but they can't be used to pay employees, rent or suppliers. Growing profits doesn't always mean having more cash on hand. Profit is the amount you expect to earn over a time period, and cash is the money you need to keep on hand for the day to day operations of your business. If profit is not accompanied by positive cash flow, it holds very little value. Cash flow is the movement of money in and out of a business. Watching the cash flow is one of the most important jobs a business manager has; the outflow of cash includes payroll, as well as payments to creditors and suppliers. Inflow is the money received from investors, lenders and clients.
Positive and Negative Cash Flow
If a business' cash flow exceeds its outflow, it is said to be positive. Positive cash flow is a sign of good financial standing, but it is not the only indicator. If the situation is reversed and outflow exceeds inflow, the company's cash flow is negative. Reasons for this can include excess or outdated inventory, poor collection practices, and others. If a company cannot secure additional funding at this point, its future may be in jeopardy.
Cash Flow Components
Cash flow statements show the sources of cash and how it is used, and they are separated into three parts:
*Operating cash flow or working capital. It is the cash flow generated from the business' operations, product or service sales, and it is under your control because it is internally generated.
*Investing cash flow, which is generated from non-operational activities such as investment in fixed assets, losses or gains that are not recurringm or a variety of other sources.
*Finance cash flow; this goes to and from external sources like shareholders, investors and lenders. Loans, their repayment, stock issuance and dividend payments are typically included here.
To practice good cash flow management, you need to know when, where and how you will need cash. You will also need to know where to go to get your financial needs met, and keep good relationships with lenders and creditors in order to keep meeting those needs. To begin, develop a cash flow projection. A good business owner will be able to develop both a short and longer-term projection to assist them in managing daily cash and their financial needs down the line. A good money management software package can be a great deal of help to achieve solid money management.