In very small business effective cash management is important, cash is among the most important assets, and if not the most important asset you can have. Many business owners have come to realize that cash is the blood of every business, without it in plenty supply; your business simply cannot survive.
Unfortunately, many business owners confuse profits with money, thinking that if they're earning income it means they have money. That's not always true. Learning how to effectively implement cash management, especially in the early struggle-filled days, can mean the difference the difference between success and failure for your company.
No business can survive without working capital. Even with monumental profits on the books and the promise of growing future sales, a company without working capital 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 this driving force, 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.
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 more revenue has to go out before it can possibly come in. Service companies may not need a lot of the revenue flow at first, but that doesn't mean they won't need it before it comes in. You need to understand that simple principle of cash management.
Luckily, there are a lot of things you can do to prevent that dire situation. The most important one is to know how revenue 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 ventured into.
Secondly, you need to write an effective business plan that is realistic and can be implemented without a lot of problems.
Finally, you need to have financial knowledge in order to make effective financial decisions. If want to learn more about financial accounting click here.