Many owners of emerging businesses struggle to stay on top of their finances, and needless to say, this is dangerous for their business.
I can’t really blame anyone for it; I know that trying to keep on top of every cent that comes in and goes out of a small business is a long-winded process. It can be overwhelming to absorb all that information and focus on understanding your finances once the pressure of making more sales, servicing customers, and managing staff hits.
This is why small business owners often fail to remain aware of their finances, and as business means making money, neglecting finances spells disaster.
Educating yourself about the nitty gritty of finance, then, is an important first step to take. Having detailed knowledge on all aspects of your finances will help you manage it a lot better.
But with the topic of finance being so broad and confusing, you probably don’t even know where to begin. So here’s my advice, as a business coach: the best place to start is knowing cash flow, revenue, and how these two terms are different from each other.
The rest will follow later.
Investopedia states that cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.
One way to put it is that cash flow is the lifeblood of your business, and to keep your business alive, you should keep that ‘blood’ circulating through generating and consuming your cash.
What you should aim for is a positive cash flow. Having a positive cash flow means that your business has increasing liquid assets. This also means that it can settle debts, reinvest in the company, pay out money to shareholders, and provide a buffer for any financial struggles your business may face in the future.
The cash flow statement (CFS) is used to assess your company’s flexibility, liquidity (the ability to turn assets or investments into cash), and overall performance through reporting these three forms of cash flows:
The free cash flow, determined by subtracting all capital expenditures from the CFO shows the true profitability of the business, as it shows the money the company has left for the expansion of the business or for shareholder returns after taking account cash outflows.
Revenue, or sales, is the income a business receives from its normal operations and other business activities. It is the gross income figure that determines net income after costs are subtracted.
For emerging businesses, it is important to have a positive revenue early on.
There are two types of revenue: the operating income, and the non-operating income.
For government agencies, revenue is the money from taxation, fees, fines, inter-governmental grants, any sales made, etc. For non-profits, revenue comes from donations, government grants, investments, fundraising activities, etc.
Knowing what revenue is and what it means to your business’ finances is useful because it helps you determine your profit.
According to Investopedia, “Profit is the amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs.”
Profit is also referred to as net income, and has three types: gross profit, operating profit, and net profit.
Gross profit is revenue minus the cost of goods sold, including raw material costs, labor costs, and manufacturing costs used to produce the goods.
Operating profit is the gross profit minus all other fixed and variable expenses relating to the business including rent, utilities, payroll, and etc.
Lastly, net profit is the income left over after all expenses have been paid, including taxes and interest.
At the end of the cash flow statement is the net profit, which can also be calculated by ‘balancing’ the three mentioned activities (operating, investing, and financing cash flows).
Both are essential to help you evaluate the financial health of your small business. But while computing for net profit through cash flow and through revenue will result in the same amount, cash flow and revenue are still very different from one another.
Cash flow breaks down the costs and expenses of a company into operating, investing, and financing activities, which helps determine its overall fitness of the company in its industry.
It’s an overview of where the company’s money comes in and goes out.
Revenue, on the other hand, is solely what your business gains from the sales of your products and/or services and other one time events.
It is important to know how they are distinct from one another, because these two measure the success of your business in different ways.
Cash flow is a liquidity indicator. You want a positive cash flow so that your company will be ready to pay for debts and unexpected costs, reinvest in itself, and return money to your shareholders (if it's relevant).
Revenue has nothing to do with that; instead, it measures the effectiveness of your business’ sales and marketing. High revenue means that your company is doing great in selling what you offer. But a high revenue doesn’t necessarily mean that your company is flourishing. What you have to watch out for is that your revenue always exceeds all other costs.
Having a positive cash flow means that you have an availability of funds.
You therefore don’t ever want a negative cash flow because that means that you will either need to dole out funds from your own pocket or watch your company die.
In all my years of business coaching and business ownership, I’ve seen what works and what doesn’t when it comes to keeping a positive cash flow.
Here are tips that I’ve put together for emerging entrepreneurs such as yourself:
Knowing and understanding cash flow and revenue will help you in making sure that your business is on its way to success.
While keeping both revenue and cash flow is essential in your business, the ways to keep them both positive varies.
A positive revenue will provide more opportunities and resources for your business. To have a higher revenue, you should keep improving on your sales and marketing.
A positive cash flow shows that your business has enough cash at your disposal to keep your business running and your liabilities under control in the forthcoming period.
With all these factors in mind, I can guarantee you’ll be able to handle your business’ finances better and know how to manage your company’s expenses, pricing, marketing strategies, and arrangements with your customers more effectively.
After that, you can watch your profit grow.
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