4 Types of Money Every Business Needs

business moneyAre you making money? For many small business owners, this is a difficult question to answer. Some will simply look in the checkbook, and if the balance is adequate to make payroll and cover the bills on their desk, they answer, "Yes."  If not, they answer, "No."  Others look at sales. If sales are up, they answer, "Yes."  If sales are down, they answer, "No."  Yet others simply want to know if there is cash available at the end of the month to take home. Some business owners handle money very well while others struggle with it. What makes the difference? I want to spend the next few posts offering some help and guidance to business owners on this subject of money. As always, I encourage you to speak with your CPA about these matters. However, I've discovered that many times business owners do not know what to ask their CPA, and CPAs don't always know how – or have the time – to coach their clients on these matters. My aim is to give you a basic understand of money that will make your conversation with your CPA useful and efficient. It is important to think of money from four perspectives. Sometimes I refer to these perspectives as four types of money you need in your business. Tweet This

Income

The first type of money you need is income, which is what you are paid by your customers for your products or services. To the business owner who thinks more like an employee or technician, this is the most important perspective of all. You may be surprised to find out that, while income is important, it is probably the least important for the Strategic Business Owner. If that statement sounds confusing, talk to me to find out what it means to be a Strategic Business Owner. Of course, we all want our business income to increase, but please know that increasing income does not necessarily mean that the business is healthy financially!

Profit

Profit is what is left over when all operating expenses are paid. If there is no profit, there is something wrong with the business. Profits can be used in four ways. It can be reinvested in the business to feed and support growth, or it can be used as operating capital to shore up prior or future shortfalls. It can be used as bonus capital to reward people for their personal performance, or it can be capital that rewards the owner for his/her courage and hard work. However, if that profit is tied up in receivables or inventory, you may not realize the pleasure of it!  So profit can be a little deceiving too.

Cash 

This type of money typically creates more anxiety for business owners than almost anything else. As was alluded to, you may have profit but not have cash flow. This can be devastating to a business, which is why you've probably heard the phrase, "Cash is king!" But cash is not the whole story. You must be able to see the "flow" of the cash and make sure that the flow is adequate and consistent over time. Managing cash flow requires incredible attention, and it is ongoing. Cash flow is a dynamic element that is constantly affected by your income, your receivables, and your payables. If you develop the skill to project and control cash flow, you will gain great confidence and peace.

Equity

Sadly, most business owners do not fully appreciate the value of this fourth type of money. However, for the Strategic Business Owner, this is the most important money perspective of all. To the Strategic Business Owner, the business itself is the most important product, not his/her services. I hope this will help you gain a broader perspective about money in your business. It is our aim to help our clients in Sugar Land, Katy, and the Houston area grow their businesses in sustainable ways. As a business coach and executive coach, I appreciate the opportunity to help you grow your business and to balance your life. Contact us today to learn more about becoming a Strategic Business Owner. To stay up with these posts, I encourage you to subscribe to our blog or follow me on Twitter.

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