Today we’re going to take a look at business finances. When it comes to business, cash is king. Without cash, your business will shut down. But how do you generate cash, and what are some of the pitfalls of these sources?
Sales Can Cause Cash Flow Problems
Sales are a primary way to generate cash for your business. However, the optimum amount of sales is necessary to result in the right amount of cash. Not enough sales mean not enough cash. This will end your business unless you can find a way to dial back costs quickly. Ironically, too many sales cause a cash flow problem as well. As sales volume increases, you need to produce more inventory, hire more staff, and buy more equipment, all of which increase your overhead costs. In fact, unless all you do is receive a straight commission and pay your employees based on straight commission, you will almost always have some cash-intensive costs when you make more sales.
As we can see, both situations – not enough sales and too many sales – can lead to cash flow problems. Fortunately, sales are not the only source of cash. You also can sell stock or assets or take out loans. These are all ways to create cash for your business that have nothing to do with your sales numbers. Also, you have more control over these cash sources than you do sales because they’re not dependent on client satisfaction, demand, competition, production, or other factors that can affect sales.
Tax Gap Concept
The tax gap may come to mind, but this isn’t an adequate answer to creating cash for your business. You may spend $100,000 to increase your inventory, hoping to increase your sales. This can cause you to be completely broke; yet, you still owe taxes. That’s because that $100,000 you spent on inventory is not deductible right now. You have to sell the inventory. The cost becomes a cost of goods sold, which then can be deducted from gross receipts in computing business income, according to IRS Fact Sheet 2006-23. But this still doesn’t give your business the cash it needs today.
Keep An Eye On Cash Flow
Cash flow is a primary concern of every business. There isn’t one source that can ensure a problem-free cash situation for your business. Sales are a good and main source of cash for most businesses, but as we saw above, too little sales or too many sales both result in not enough cash. Therefore, the answer is to have a good forecast of your cash flow needs and be prepared for downturns and ramp-ups.