Where are you in your business? Are you still sitting at the kiddie table? Or have you and your business grown up?
If you’re still at the kiddie table and you want to play with the big boys (and girls), it’s time for your business to grow up. Otherwise what’s the point?
Growing A “Real” Business From Nothing
There are stages to being in business. The more traditional ones go something like this… Startup, Growth, Mature.
The less traditional one, at least the one in my head, goes something like this…
hobby (making no money),
hobby (making a little money),
hobby/business (side-hustle/hobby making “decent money”) and
business (making enough money to support yourself & your family).
If you look closely, the traditional stages of growth and less traditional ones are similar but different. The difference is perspective.
A lot of business owners start off with a dream. They start off with a hobby that they are passionate about. Something that they are good at that they get the bright idea to turn into a business because one morning, they wake up and say, “hey, I could probably make money if I sell this service or widgety thing that I made”… and they… YOU are off to the races. Right? WRONG!
A business can have all the bells and whistles that legally define it as a business but until YOU take action and really take it from fledgling idea to profitable endeavor…it’s just a hobby. (And the IRS will agree with me).
If you lose money year after year… your “business” that you take deductions for…the one that has never made any money? Yeah, that one. That “business” may be in danger of being defined as *gasp* a hobby. And when that happens you can say goodbye to those good ole tax deductions.
We don’t want that… so let’s get going from hobby to business sooner than later.
The heart of any business and taking it to the next level is CASHFLOW.
What is Cashflow
So what the heck is a “cashflow” and why do you need a good one?
Cashflow as the name indicates is the cash flowing in and out of your business. You want to have a positive one. Basically, you want to have more money coming INTO your business than you have going OUT of your business… making it a “positive cashflow” situation. The more positive it is, the better. A positive cashflow is one indication that your business is a healthy one. And that’s a good thing.
What impacts Cashflow
I kind of alluded to this in the prior section. By definition, cashflow is the inflow minus the outflow of cash (or money) in your business.
So what impacts it? Anything that adds to cash or subtracts from it.
Typical cash inflows include: service fees, revenue (anything that increases your cash)
Typical cash outflows include: expenses, bill payments, owner distributions/draws (anything that decreases your cash)
How to get your Cashflow number AND a Forecast
A lot of folks just use their bank account balance as an indication of what their cashflow is but that number can be a little misleading for a few reasons. Using your bank balance doesn’t take into account that you have outstanding items pending (like pending deposits or pending bill payments/debit card transactions) that have not cleared yet.
So what should you do instead? Your cashflow is: your bank balance + pending deposits – pending payments.
What if you want to know what your future cashflow is going to be? To get your forecasted cashflow, take your current cashflow (above) + future deposits – future payments. With the help of software, this is actually easier to do than you think.
Why is it important to monitor it
Like having a budget, knowing and monitoring your cashflow is important for planning purposes. When you know when cash is coming in and going out… and where it is coming from and going to, you can plan large purchases and anticipate things, such as anticipating when you may need to tighten your business finance belt and when you may be able to breath a little easier or take a vacation.
What to do to get to the next cashflow milestone
Want to get to your next cashflow milestone? Here’s what you’ll need to do…pay attention to what’s working in your business and what’s not working. In order to do that, you actually have to look at your numbers more often than once a year when you check in with your tax accountant. I recommend that you take a look at and evaluate your business’ progress at least quarterly (every 3 months) until your business is really thriving. Once it gets to that stage, you should be checking in on your numbers monthly.
So there you have it. That’s it. The ins and outs of cashflow. If you aren’t checking yours regularly, at least check it quarterly. Have you checked yours for the first quarter? How’d you do?
If you have questions, comments or need some help setting this up for your business, shoot me an email or leave a quick comment below.
Until next time,