Whether you’re running a small business or just keeping looking after your household accounts, the concept of ‘cash flow’ is a very important one to bear in mind.
Cash flow is the process by which money comes into a business and then goes out again. For example, if you are selling goods, operating a small restaurant or driving a taxi your aim is to get enough money coming in from the goods and services you sell to pay for all the things associated with running your business. And have some money left over at the end of the month so that you can afford to pay yourself a wage.
In the case of a taxi driver this would include the maintenance on your vehicle, road tax, insurance and petrol. In the case of a small restaurant the costs would involve the rent and rates on your premises, insurance, heating, cleaning, food, drink and wages for staff (if you employ them).
A good cash flow situation is one where a company has enough money coming in at the right time to pay its bills when they are due. The main aim of a business is to get the cash flowing in the right direction – i.e. into the company. Or rather, the trick is to get more flowing in than you have flowing out. If you don’t, and you don’t have any reserves to tide you over, you’ll quickly go bankrupt.
But cash flowing out is not a problem, it’s a necessity. You can’t buy stock or raw materials without owing your suppliers money and having to pay the bills when they become due. However, as long as you have more money flowing in, or periods when you can build up reserves, then you stand a chance of being able to remain in business.
This is why the Christmas sales period is such a big news story for retailers. Many retailers make the vast bulk of their sales during the run up to Christmas. For many, this is when they bring in the cash that enables them to keep trading throughout the rest of the year. People who run guest houses or hotels try to make enough money in the summer months to see them through the quiet winter period. Or in ski resorts they do it the opposite way round!
Exactly the same applies when you are working out your personal expenditure. To paraphrase Charles Dicken’s character Mr. Micawber, if you have £1000 income each month and spend £950 everything will be fine. If you have £1000 coming in and spend £1050, you’ve got problems! That’s what we mean about ‘living within your means’ and that’s why it’s so important to learn to keep an eye on your own finances.
Make sure you always try to ascertain how much you will have coming in each week and how much you will need to spend on rent, food, insurance, clothing, travel to work etc. Make lists. Keep accounts. In other words, plan. You’ll then make sure that you always have a positive cash flow and you’ll avoid getting into debt.
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Author: Diana Nadin
