Cash flow is the life blood of any small business and those business owners who fail to juggle the balance between money in and money out do not succeed. It doesn’t matter if a product or service is the best thing since sliced bread; lack of cash flow will stop a business in its tracks.
In the early days of setting up a business, considerable skill is required to ensure there is enough money to pay the operational expenses of the business, to pay taxes, and to reinvest back into the business for example, by increasing stock levels. On top of that, the owner needs to take out enough money to live on. That, in turn, becomes another juggling exercise, especially when unexpected personal expenses arise.
The key to success is to separate cash coming in into several streams. First, there needs to a split between money required in the business and money required for personal expenses. This needs careful planning. Too often, small business owners take whatever cash is available for personal expenses, leaving insufficient for the business.
Funds left in the business should be separated into money to cover operational expenses, money to be set aside for taxes, and money required for reinvestment into the business to help it grow. A shortfall on money for taxes or reinvestment can threaten the success of the business. Ideally, each of these streams should have a separate bank account.
Money for personal expenses should be kept completely separate from business expenses. The best way to achieve separation is to pay a set amount each month from the business to a personal bank account. Personal credit cards and EFTPOS cards should never be used for business purposes and vice versa, otherwise it will be very difficult to have clarity of your financial situation.