To start a business, you need a great idea, determination, and some resources. If you can combine those with a healthy dose of timing and good fortune, you stand every chance of getting your start-up off the ground. As hard as that may be, it’s only the start. In many ways, the hard work only begins once your business is operational. One of the hardest things that all new entrepreneurs have to grasp is money. As strange as it may sound, the nuances of the financial world are often overlooked or misunderstood not just by business owners by the general public. Knowing how to put in place your company cash flow plan is critical.
In essence, you need to know how money and finances work if you want to make the most of what you’re earning. Of course, we’re not saying you need to become an expert economist or hedge fund manager. However, by building up an appreciation of certain financial concepts and how finances ebb and flow, you stand a better chance of managing your business. We’ve spoken before about the importance of tax compliance for small businesses. Keeping records of your financial position, your income, expenditure, and budgets are crucial when you’re running a company.
Understand How Money Moves to Build a Better Business
However, what we’re advocating here is a deeper understanding of the financial world at large. Inc.com outlined three terms every CEO needs to know if they’re going to manage a business with a cash flow plan: cash flow, net income margin, and revenue growth. Within every business, there are three main financial statements: cash flow, income, and the balance sheet. Income is something most people will be familiar with as it’s the money that comes in from trading. The balance sheet is the result of your income minus expenses. However, cash flow is a little less obvious. In general, this term refers to the new amount of cash (and cash-equivalents) flowing in and out of a company. Things get less clear when you talk about cash flow from operating activities (CFO).
This term refers to net income plus non-cash expense plus/minus the balance of changes in current assets. In other words, CFO is the amount of money you bring in from ongoing regular business, minus daily expenses. It doesn’t take into account long-term capital expenditure or investment revenue. CFO basically provides a snapshot of how your business is performing on a day-to-day basis. It removes any future projections and allows you to look at the now. That’s important. A lot of business owners are content to have a negative CFO on the promise of future profits. However, in business, the future is never guaranteed. If you want to build a fortress, you need to lay down solid foundations and cash flow plan and, in this instance, that means working to have a positive CFO.
Don’t Operate on the Promise of Tomorrow
This concept of understanding the now in order to achieve positive long-term gains is particularly important in the financial markets. Forex trading is all about daily price movements and balancing short-term investments with long-term propositions. Even before an investor starts putting money into the market, they’re weighing up their options. By using online broker comparison tools, traders can find the conditions that best suit their goals. Comparing brokers based on maximum leverage, spreads, and trading instruments allow investors to set the right conditions before they start. From there, it’s all about watching daily movements and reacting accordingly. Unlike indices and commodities, forex prices can fluctuate a lot more. By measuring pips (i.e. digits after the decimal point), micromovements are possible. Keeping on top of these requires constant monitoring.
This is very much like the process of staying on top of your CFO. A trader will have multiple investments running at one time, which means they almost need to forget about the long-term and focus on what’s happening at the moment. Only by tracking the micromovements and opening/closing positions as required can a trader build a strong portfolio. Again, this is very much like running a business. As a CEO, you need to have a solid cash flow plan and be on top of micromovements in spending and income. When you’re able to monitor and refine your CFO on a daily basis, you’ll find that the future takes care of itself. In essence, the message here is money is always flowing. Even though you might have a long-term vision, money doesn’t care. Working on the promise of tomorrow is a risky strategy. To create a thriving business, you need to look after the pennies every day. Do that and, in theory, the pounds should look after themselves.