Always Know Your Cash – The Importance of Having Cash
No business can survive without cash. Even with monumental profits on the books and the promise of growing future sales, a company without cash will not make it. If you don’t have enough money to pay your bills, your vendors will stop supplying you with whatever it is your company needs to generate sales.
More small companies go out of business because they’re out of cash than for any other reason. In fact, the bankruptcy courts are full of small- business owners whose companies just couldn’t pay the bills any more.
FACT
Product-based businesses usually have more money troubles than do service businesses. That’s because any company that sells products has to first buy them (or the materials necessary to create them). That almost always means cash has to go out before it can possibly come in. Service companies may not need a lot of cash at first, but that doesn’t mean they won’t need it before it comes in.
Luckily, there are a lot of things you can do to prevent that dire situation. The most important one is to know how cash really flows in and out of your business. Then you can plan for shortfalls before they occur, nipping that problem in the bud. The easiest way to avoid cash crunches is to put enough money into the business at the start; absent that, you may have to contribute more capital or take out a loan to cover temporary crises. New businesses often use more cash than they bring in during the first six months to a year, depending on the type of business. Count on that in your planning stages.