Often I hear of people who have invested in a home business, have performed their due diligence on how much it costs to set up the business and yet within a few months find themselves in a worse financial position than when they started. For all businesses whether they are small home business or multi-million dollar corporation, there is one law that runs throughout. This law states that “cash flow is king.”
Poor cash management is probably the most frequent reason for home businesses failing to succeed.
There are numerous examples of companies who have had full order books but who were unable to maintain themselves in business due to cash flow problems businessmantalk.com . If it is true for large corporations, then this is also true all home businesses where income is essential to pay for mortgages and to feed and clothe ones family.
So let’s get back to basics. There is a fundamental difference between the increase in profit and having cash. Profit is defined as the amount of money you expect to make over a given period of time. For tax purposes this will be for a specific financial year. For the vast majority of businesses the first year or sometime a couple of years the business will not have profits. Cash, however, is the key to make a business run. You need the cash to purchase supplies, training, marketing etc. You can’t spend profit; you can only spend cash.
Cash flow therefore defines the movement of money in and out of a business. Positive cash flow means that more money is coming into the business than going out. Negative cash flow means that more money is going out than coming in.
I would propose that there are three elements to successful cash flow management.
- The business owner needs to have a good idea of when, where and how cash will be moving within his business. This need not be complicated, but it is essential. I was recently reviewing the development of a small business with a friend who was looking at expanding. I had to admit, that they had an impressive vision of where they were going. However, I drew to their attention that if they were to grow as they projected then they would need to have the resources to meet the expected demand. They did not have the cash available to invest in those resources. There was no point in investing in extensive marketing if in the end a business does not have cash to deliver to its customers.
- Each business will require investment. I do enjoy watching the television programme called “The Dragons Den.” In this programme people with “ground-breaking” ideas (as well as those not so ground-breaking!) present their ideas to a panel of successful business investors who review what is being offered. The ideas that the “dragons” believed would be profitable would be invested in. They all realise that in order to achieve their dreams, they need financial input. Other investment sources may include an owners own savings as well as private and commercial loans.
- It is important to review on a regular basis the cash flow situation and to take decisions on whether to progress based on hard facts. It is no coincidence that accountants of large organisations provide monthly reports on the organisations financial position. If this is important for large organizations, it is also true for home businesses. A home business that on a regular basis requires considerable amount of money invested into it and offers a small return should be seriously reviewed.
During my time working in project management consultancy, one of the control points that we used was known as a project “gate.”This gate normally took the form of a senior managers meeting during which time the project manager provided details, amongst other things, of a projects progress, it costs, its risk and issues and how it aligned with the original business requirements as well as reviewing its assumptions and expected benefits. For smaller businesses especially those with limited financial support this exercise is crucial.
The home business owner should also set have financial goals and objectives that allow him to evaluate whether a business is going to be a profitable business or not. Cash flow is undoubtedly one of the most important elements that need to be included in any business plan.
It is important to ensure especially in the first few months, that the home business owner has enough financial resources available to allow the business to grow. The vast majority of people setting up a home business will not have the benefit of a bank loan or significant financial resources to get started. It is crucial therefore that operating costs are kept to a minimum.