We’re talking about cash flow this month and we’ve seen how it came to be king and peeked into an artists business to see what happens when it goes unchecked. Are you keeping an eye on your cash flow? Here’s an easy way to get started.
The Most Important Thing
If you don’t keep track of anything else, this is the one thing you need to watch. There’s a forest of wordy jargon and prickly accounting statements around cash flow but it’s nothing more than watching the money in and money out of your business and checking to see if the net result is positive or negative.
You can measure that by checking your bank balance from month to month. If it’s growing that’s positive cash flow. If it’s shrinking, that’s negative cash flow. Get your last six months bank statements and a piece of paper. Write down the ending balance for each month, in order. Is it getting bigger or smaller?
What to Watch
There are four things that cause your cash to go up or down. The tricky part is that more than one can be at work at a time. Do any of these sound familiar?
- Unusual Expenses
If it stays the same for most months and then dips suddenly, that could mean you had some unusual or infrequent expenses that month. Maybe you got a fantastic deal on supplies and bought six months worth of paper or your business license and insurance were all due in the same month.
If the balance goes up one month and down the next, it might mean an expense was paid twice in one month and not in the next. This sometimes happens with recurring expenses like rents and maintenance costs.
- Unusual Sales
Your cash going up suddenly can be an indicator of extra sales such has from a show or large order. A sudden dip in a month could also be from a drop in regular sales if you took a few days off or some outside event, like really bad weather, caused sales to go down significantly.
- Escalating Expenses
If the balance is heading down steadily, that’s more serious. It may be a result of expenses going up without corresponding sales to offset them. This can happen when your materials and supplies cost more or your overhead costs have crept up.
- Dwindling Sales
The most serious cause of a steady fall in cash is declining sales. It’s the hardest source of cash to influence and has the longest lead time to change. Some of the reasons for a decline in sales may be under your control, such as pricing and product improvements, or they may be something you can’t control and have to adjust to, like a tough economy or new competition.
Take a few minutes to check and write down your cash balances. Next time, we’ll talk about ways to expand on that information and use it to make better decisions in your creative business.
What did you find when you did this? How do you feel about that? Let me know in a note or the comments, I’m looking forward to hearing from you.
photo credit: Philippe Put