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As like many business start ups, we are most satisfied when our accountant shows our income statement having a healthy profit, yet it doesn't really show the entire picture. This in fact is misleading specially if you are not good at reading financial statements.
One of the biggest mistakes made by most business start up owners is allowing clients and customers to buy now and pay later. In other words, extending credit in exchange for your services or product.
I believe there should be a big line between you as a business start up owner and credit. The business idea is, since you are still at the start up level, cash flow is the lifeblood of your business. Without cash flow, your business will slowly wither and very soon, it will cause the closure of the business. Irregardless of how many sales you made or how much money is owed to you, without cash flow, your business start up will be short lived.
Cash flow represents the amount of money coming in to your business through services rendered and products sold, and money going out to cover expenses and certain operating costs.
As a business start up owner, your main concern is to balance the money that is coming in and out of your business. It is of most importance that the flow of cash is consistent, with more money coming in rather than the opposite. Although, since you are at the Business start up, it is considerable to have a negative cash flow on the first two months of your business.
Once your business experiences a surplus on cash coming in, this will continue to contribute to your business viability. Such examples are, it allows you to make early payments so you can benefit from vendor discounts, take advantage of special deals, capitalize on new found opportunities and many more.
Also in my personal experience, having a positive cash flow early on the start of my business gives me a certain assurance that I am doing okay. It gives me, as an owner, a sense of "temporary success" which makes me be more positive in keeping the business that way.
Of course the opposite happens when your business start up is experiencing a negative cash flow. As soon as cash flow fails to produce the surplus funds you need, challenges arises, stress levels go up and an overwhelming feeling will quickly follow. Not only that, your employees will feel it too. Once their paycheck is delayed, fear and doubt starts to affect their performance in their respective tasks.
Like real estate investor Trace Trajano says, "cash is king". So in any business start up, the idea is to monitor your cash flow always and target to get a surplus by the end of 2 months.
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