Small Business Cash Flow Basics

One of the most important aspects of running your own small business is keeping track of your cash flow. Some of us groan at the thought of record-keeping and making sense of all the numbers, but this can make the difference between a successful business and one that merely flounders at the start, then goes bankrupt. This article will explain the very basics of business cash flow.

Your business' "cash flow" is exactly as it sounds-the flow of cash in and out of your business. Money that you are getting into your business is called "income." Money leaving your business is called "expenses." For a business to be profitable, it must have more income at the end of the month than expenses.

The basic formula for determining the profit your business is making is:

Income - expenses = profit

Add all the income your business receives through services, products sold, etc, to get your first figure. Then add all your expenses-this not only includes costs for providing your services or making your products, and things such as rent, electricity, advertising, and loan payments, and subtract that from your income. All the money you have left over is your profit. Don't be worried if you're just starting out and your profit is a negative number; many businesses don't see an actual profit until they pay off their start-up loan.

The above equation should not be used when determining the actual value of your business. When determining your value, you must take into consideration all your assets and liabilities. To reach this figure, you should subtract your liabilities from your assets, and then add any actual money you may have on hand-in registers, bank accounts, etc.

Assets are physical things you own. For example, if you own a moving business, and own three trucks, these trucks are considered your business' assets. Also included are invoices you have sent to customers, but have yet to receive payment for.

Liabilities are invoices or bills you've received from other companies or individuals that have yet to be paid. Liabilities an include plumbing or electrical bills, or can be related to your assets, such as a loan taking out to purchase equipment.

Running a small business can be hard, but very successful if enough attention is paid to the flow of cash in and out of your business. Stay on top of your cash flow, and work hard to ensure your income and assets amount to more than your expenses and liabilities. With proper record keeping, you're sure to be a success!