If you want to be successful as a small business owner, you will need to become comfortable with understanding the relationship between cash flow and debt.
Cash flow refers to the amount of cash going into and out of your business. That might sound obvious, but it’s a concept that many entrepreneurs underestimate (or ignore entirely). They assume that “revenue” is the same thing as “cash,” which it most certainly is not. Unless you are operating a purely cash-based business (which sounds pretty shady already), your customers and partners are probably paying you with credit cards, debit cards and other financial instruments.
As a result, your business probably has a mix of “accounts receivable” (money that people owe you) and “accounts payable” (money that you owe others, such as suppliers). If these two are not matched properly, that can generate cash flow problems. Simply put, you have more cash flowing out of your company than you have flowing in.
It’s the same problem that you might already face as an individual – you have a set of monthly bills to pay, and you are also waiting on checks, bank deposits or other payments to hit your bank account. How many times have you waited to pay the mortgage or some other bill until you had enough money in your bank account? Well, companies face the same problem.
By setting up cash flow tracking, you can avoid some of the negative consequences that result from a cash flow mismatch. For example, you can avoid debt. In the case of the individual, this is same as avoiding the trap of putting everything on your credit card until you have more money in your bank account! The biggest problem with debt is that it puts a huge strain on your business in terms of future payments to pay off all that debt.
It’s important to see that cash flow and debt, while entirely separate financial concepts, are actually related in more ways than you think. By tracking your cash flow, you can avoid debt, and by doing so, you can pave the way for the future growth of your company.