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HOW WILL YOU MAINTAIN A POSITIVE CASH FLOW? When You Spend Money, Be Sure You're Not Endangering Your Business.
By Bonnie Drew
When your business starts making money, it will be very tempting to spend every penny on things you've been wanting. If you do, you will endanger the future of your business.
Suppose you invest $50 you saved from birthdays and allowances to start a T-shirt business. You buy supplies to make eight shirts. Everyone loves the shirts and you sell them them all in a week and have $120 in your pocket. That's the exact amount you need to buy the new pair of boots you've been wanting. So you spend all the money on the boots. Now you have a pair of boots valued at $120, but no money to buy more supplies and run your business.
Your business has already gone broke.
You can change this story to have a happier ending. You invested $50 and made $120, so your profit was $70. Since you are a smart business person, you put the $70 profit in the bank. Then you use the $50 to buy more supplies and make another $120, giving you another $70 profit. Now you're on a roll. You've still got your $50 start-up money, and you have $140 profit in the bank. You can buy the boots for $120 and have $20 left for emergencies or to buy more t-shirt supplies. Your business is steadily growing.
The first rule of having a healthy cash flow in your business is: Never spend your operating capital. Always keep a reserve of cash to buy more supplies and operate your business. This is known as maintaining "a positive cash flow."
Maintaining a positive cash flow requires thoughtful planning. The best tool for planning your spending and saving is a budget. A budget is simply a written plan that balances the INcome and OUTgo (cash flow) of money in your business.
Some young people don't like the word "budget" because it sounds like a diet, which means "I can't do things I want to do." Remember, this is not a budget someone else makes you follow. You are the creator of this budget, so you determine how much you want to restrict or release your cash flow.
If you have trouble balancing your budget (we all do), there are three things you can do:
- 1. Earn more
2. Spend less
3. Set priorities
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Setting priorities is a valuable skill in business. Make a list of all the things you want or need. Then number the items in order of their importance. Then you will know which expenditures you can do without (or delay) until you can earn more money.
Your budget is a very important part of your business. When you are satisfied with the final version of your budget, include a copy in your business plan.
Bonnie Drew is the author of FAST CASH FOR KIDS (2nd edition), published by Career Press (1-800-227-3371). She is also the creator of the KIDS BUSINESS software for young entrepreneurs, available from Homeland Publications (713-332-9764).
Drew is also Editor of YoungBiz online magazine, published by Kid's Way, Inc., a company that helps youth prepare for business and the workplace of the 21st century. For more information, write to Kid's Way at 5589 Peachtree Rd, Chamblee, GA 30341 or call toll free 1-888-KidsWay (1-888-543-7929). YoungBiz magazine can be found at: http://www.youngbiz.com