In simple terms, handling your cash flow is knowing the “cash coming in versus cash going out”. Managing cash flow is also about making sure you have money to “keep the electricity on” and continue the business operations. You also want to have a plan in place for the unexpected.
Running out of cash can cause your business to close if not properly managed. Many start-ups close quickly because of poor cash flow management. While cash flow management is an essential subject, it isn’t difficult to understand and follow a break-even analysis. Good cash flow management for a new business is kind of straightforward than you might think, you just need to understand and practice a few things.
The Break-even Point (BEP)
The Break-even Point (BEP) is one of the most important metrics to understand about your new business, which is the point at which your current (or projected) revenues will allow you to meet all your operating expenses. The Breakeven Point is the absolute minimum amount of cash you need to keep your employees paid, to keep the lights on, and your doors open ‒ and the breakeven point usually changes frequently.
Once you learn how to manage your breakeven point, you will be able to remain functioning, which means you can devote more attention to evolving your business into meeting your goals.
Having Cash Reserves for the Unexpected
If you examine other reasons why small businesses fail, you will see the reasons are closely related. According to one study, about 79% of businesses fail because they start out with insufficient cash. 77% run into troubles when they fail to price properly. 73% close because they were either too optimistic about achievable sales, about the money required to generate those sales, or both at the same time.
These types of issues are common with small businesses, and particularly with those controlled by an entrepreneur who may be running their first small business. These issues tie directly back into cash flow management.
The Importance of keeping a Cash Reserve
Every new business should plan on issues coming up. If you don’t have a “cushion” cash reserve, then every problem can evolve into cash flow issue. But if you have something to fall back on, you have the clarity you need to learn from the situation and double down with your focus on growing your business moving forward.
In the end, always remember managing your cash flow is something you need to be proactive about. Not only do you have to know where you are today, but also need visibility into where you’re headed tomorrow, and a break-even analysis can help. If you need answers on how to manage your cash flow, contact Total Accounting at email@example.com.