I had my most recent ‘cash flow‘ lessons in my real estate business. We all know about how tough that market has been the last year or two – a real housing crisis.
But what does the housing crisis have to do with cash flow and what does either of them have to do with starting a business? Well, a lot of people own a house, usually the one they live in, so most people feel the housing crisis. But most people use the term cash flow for business, not personal, finances.
Let me ask you a question: What is the Golden Rule of Real Estate?
Location, Location, Location.
NO, not that one; the other golden rule. What is the golden rule of real estate investors?
Cash Flow is King!
Yeah, that’s the one. The current housing crisis and credit crunch reminded me, personally, that cash flow is indeed king – a lesson I won’t soon forget. I knew about cash flow, of course, but sometimes it takes a near miss to really get the point across.
Robert Kiyosaki talks about cash flow in several of his books, like Rich Dad, Poor Dad and Cash Flow Quadrant. Actually, he probably talks about it in all of his books.
Cash flow is the money used to pay your bills – regular income that can be used to pay expenses, keep the lights on and keep your business open. When you think about it that way, Cash Flow really is King!
Often new businesses, ‘startups’, use ‘cash’ in place of cash flow during the early days for the very simple reason that the aren’t generating any sales yet. Independent businesses aren’t like jobs – there is no guaranteed paycheck every two weeks.
Many new businesses go out of business in the first year – a scary percentage, in fact. Inadequate cash flow is the primary reason. But what does that really mean?
Inadequate Cash Flow = Ineffective Planning
Usually too optimistic on the Sales side and too liberal on the Expense side. Once the money is spent (expenses), it’s gone! When the Sales don’t come in as quickly as ‘planned’, voila – cash flow problem.
So what does that mean for the independent businessman?
First and foremost — make some money before you spend it! Don’t go on that company trip until after you start generating sales and revenue.
Second – plan to have enough ‘cash’, actual liquid or near liquid assets, to cover the worst case scenario startup. If you won’t have sales for 6 months in the worst case scenario, you need a full 6 months of expenses in CASH before you even start.
See how important being frugal and holding down expenses can be?
Finally – make sure you actually have a plan! It sounds simple, but far too many entrepreneurs set off without a plan at all. Even a basic plan (with financials) is better than no plan at all.
If you don’t know how to draw up a business plan, there are many resources on the internet. A business coach is a good resource. Take out a pencil and a napkin and get your ideas down in writing – you’ll want something to show your coach to get you started.
I don’t know how many people who had phenomenal ‘belief in their business’ and still didn’t make it. Personally, I believe you’ve got to capture that belief in something a little more concrete, like a business plan that recognizes the Cash Flow is King!