Importance of Cash Flow Forecasting for Parents Wanting to Start a Small Business

Importance of Cash Flow Forecasting for Parents

Parents are often inspired to start a small business to add income to their growing family. Having children to support, and then to educate in the best school they can afford, is a great motivator for parents to start a small business together.

This new enterprise is usually the vehicle for the parents’ hopes and dreams for their young children. However, being motivated and inspired is not enough to ensure the success of your budding enterprise. You will need to learn about the basics of doing business in order to survive and thrive.

What is Cash Flow?

Cash flow is the basic concept of running a business.

It simply means the movement or flow of money in and out of your business. Positive cash flow means that you have more money in the bank than any bills and salaries that you have to pay for. Negative cash flow means that you are paying out more than the money you are receiving and this is a problem for any business.

Understanding cash flow is an important part of running your own business. You need to be aware of whether you are making more money than the costs of operating a business demand.

There’s no need to be in the dark about this essential aspect of doing business because you can learn more about cash flow before even starting your own small business. Educating yourself about the nuances of accounts payable and accounts receivable will equip you for success in doing business.

Profitability

There is a difference between profits and cash flow.

Profitability can be determined by adding up your assets and the money you are yet to receive and then subtracting all the money that you have yet to pay. The result will tell you if your business is making a profit.

However, bear in mind that profitability is not the same as having good or positive cash flow. It is possible for your business to have a large profit but still be low on cash that you can use for contingencies because that profit will take some time to be received by your bank account.

Cash Flow Statements

Putting together a cash flow statement will help you forecast your business expenses in the coming year and help you set aside enough funds for anticipated dips in cash flow in the coming months. A cash flow statement will let you know if you have cash on hand to operate your business.

Cash flow statements are different from your balance sheets and income statements. They will show all your transactions including your income and expenses, as well as reflecting how money is moving into and out of your business.

Optimising Cash Flow

For every business, optimising cash flow is crucial for success.

There are various ways to make your operation efficient. It is important to decide payment terms that will bring cash into your business in a timely fashion so that your financial well does not dry up. By offering payment options to your clients that make it easier for them to pay up, cash can flow into your business more easily as well.

Avoiding waste is an important aspect of keeping your cash flowing because money that is stuck up in goods or materials that are not being purchased is money that could be used for other expenses instead. It is also important to make sure that your customers pay on time because if they don’t, then your cash might as well dry up.

Small businesses that are just starting may fall into the trap of not charging enough for their goods or services. It is tempting to lower the amount that you charge in order for more people to afford your product or service. On the other hand, this may cause your cash to trickle instead of flow since your expenses are not reflected correctly in how much you are charging.

Preparing for Cash Flow Shortage

There are three things you can do to prepare your small business for the eventuality of a cash flow shortage.

One is to prepare a cash buffer to be on hand for at least two months all the time. Another important thing is to continue promoting and marketing your enterprise; keep the cash rolling in by constantly reaching out for new opportunities. Third, is to analyse your spending habits and trim down on unnecessary costs; especially if your cash flow is not yet prepared to take a hit.

For parents who are starting a small business together, taking the time to understand cash flow will go a long way towards helping the business survive and thrive.

By charting your cash flow and learning how to forecast it, you can be prepared for any eventualities that your business may face as well as building a lean and efficient operation from the ground up. With the appropriate knowledge and resources, you are one step into achieving your dreams for your children.

For more great financial advice, check out our Grown ups: Family finances section.

Jarrod Rendle

Jarrod is a quintessential Kiwi Dad. He lives in Pukerua Bay, and works from home in an office that overlooks the sea. His inspiration and motivation in life come from his wife and two children.

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