If you are running your own business, chances are you have asked yourself these questions at some point or another – How much cash flow do I need to run my business smoothly? In this article, we will talk answer your question so that you don’t ever have to wonder if your small business has enough money to pay its bills on time and in full every month.
What is cash flow
Simply put, cash flow is how much cash is coming into your business and how much cash is going out of your business. So when we’re talking about cash flow, we’re usually focusing on two numbers: how much income you’re bringing in and how much money you’re spending.
At a high level, it doesn’t matter if those are expenses or investments; what matters is that they’re either increasing or decreasing—or staying even.
(If you have a positive net income month after month, chances are you don’t need to worry about your cash flow at all.) If that sounds like a lot of work because it entails tracking literally every single penny going in and out of your business—don’t panic!
Where cash comes from in a business
The following is a list of sources of cash for a typical business: income from selling products or services, taking out loans from investors or banks, and/or paying suppliers with deferred payments.
As you can see, each source is accounted for by an expense. In other words, cash comes in (expense) and goes out (expense). The difference between how much cash came in versus how much was spent determines your Net Profit.
If your expenses were greater than your income – which is usually what happens when starting a new business – you will have to look at all expenses to find ways to lower them in order to get back into positive territory.
Where cash goes in a business
Most businesses operate on a cash flow cycle—you put money in, you get money out. This can work to your advantage if you have enough cash inflow to cover your expenses and pay yourself at least a living wage.
The challenge comes when there are gaps between what you bring in and what you spend (known as working capital). Most businesses rely heavily on outside capital—whether it’s from friends and family or investors—to bridge that gap until they’re consistently profitable.
Understanding where your cash is going and how much of it is available at any given time will help ensure that everything runs smoothly.
What else could you do with your cash if you didn’t have business expenses?
When you’re running a business, there’s often little room for error. Even a small cash flow issue can lead to financial disaster, especially if you’re just getting your business off of the ground and don’t have reserves.
If you want to avoid being blindsided by issues with your cash flow, it may be worth setting aside money in an emergency fund that you can access as needed. However, make sure you set realistic expectations; some expenses are just unavoidable (think health care or payroll).
The point isn’t that your emergency fund should cover all of these costs; rather, it should act as a safety net in case something unexpected happens. While having a big cushion is ideal, even $1,000 is better than nothing.
After all, it takes very little time to build up savings when you’re first starting out. Just save at least 10% of every paycheck and put that money into your savings account until you hit your goal amount.
Then continue saving after that—you never know what kind of curveballs life will throw at you!
Lessons learned over 10 years of running my own businesses
First and foremost, if you don’t have cash flow coming in, your business isn’t going to run smoothly. If your budget is more than a month out of balance, that doesn’t matter—it still isn’t going to run smoothly.
Everyone runs into challenges from time to time when it comes to cash flow but make sure you account for them and plan accordingly so they don’t stop you in your tracks. Planning ahead saves money, too!
When a client is late paying me or I spend extra on materials for a special project, it costs me more because of my extended timeline. So I always try to factor in room for error (and bumping into these kinds of challenges) when making financial plans.
Final thoughts on how much cash flow you need
I’m here to tell you that it doesn’t take much money to start a business and keep it going. For example, my wife and I started out with $3,000 in savings (and about $4,000 in credit card debt).
The business took off like wildfire and was eventually generating an annual profit of over $200,000 per year. We were so profitable from day one that we had more than enough cash flow to cover our living expenses while I worked on creating another part-time income stream within our business.
Over time we increased our incomes by growing a part-time revenue stream into multiple sources of full-time revenue. Now we have seven primary revenue streams that each brings in well over six figures per year.
You are not alone – share this blog post with someone else
Starting and running a business is tough. But it’s important to understand how much cash flow your business will need to run smoothly.
And, while it may seem like you’ll never make enough money in your lifetime, more than 60 percent of American adults are still in debt – which only makes things worse.
If you find yourself struggling with debt and trying to start a business at once, try cutting back on unnecessary expenses and living within your means.
This will give you some breathing room when it comes time to set up your company. Once you have a better understanding of how much cash flow you’ll need, take some time to create a budget that works for both your personal and professional life.
This way, if you do decide to go into business for yourself, there won’t be any surprises down the road.