Negative and Positive Cash-Flow Businesses
One of the more important considerations an entrepreneur has to make before starting a new business is the nature of the business’ cash-flow.
What is Cash-flow?
But first, let me take a step back and explain in simple terms what cash-flow really is. Cash-flow is about cash coming in, cash going out, and how much cash you have in the bank. In my previous article series titled Money Management Simplified parts 1 to 3, I talked extensively about cash flow, and explained it by using a cup of water. if you haven’t read that yet, please go to www.wealthflowproject.com and read it there.
Negative Cash-flow businesses
Now, a Negative cash-flow business is a business that has this characteristic: cash goes out first, money in the bank goes down, and then, hopefully, cash comes in.
So lets say you want to open a coffee shop, because almost everyone thinks they want to, you should first understand that that is automatically a “negative” cash-flow business. You will have to get a place to put up the shop (cash out), buy kitchen equipment (cash out), get tables and chairs for customers (cash out), stock shelves with supplies (cash out) etc. And so, your cash in the bank goes down, you pray hard that the coffee shop will produce money, you open shop and then and only then will some cash come in — depending of course on several factors still like location, marketing efforts, pricing, etc.
Does this sound familiar to you? Of course it does because almost all businesses, not just coffee shops operate this way, in a “negative” cash-flow business way.
So what do you think is the risk involved in a “negative” cash-flow business model? Without mentioning numbers, the risk is huge and is one of the reasons why a lot of businesses don’t make it.
But you see, not a lot of people notice, pay attention, or understand business cash-flow, the first thing people think about when they start a business is that they just want to have a coffee shop, or a restaurant, or a food cart, or a laundry shop because of their likes, their skill set, or business trends start taking over. And before they know it, they’ve plunked in a big chunk of their savings, or took out a loan to produce the business, and once most of the money has been spent (invested) they find themselves praying hard that their risk will pay off.
Positive Cash-flow businesses
Now lets talk about “positive” cash flow businesses. A positive cash-flow business operates this way: cash comes in first, money in the bank goes up, then cash goes out.
So here’s one of many, many examples of a “positive” cash-flow business. Lets say you want to be in the Real-Estate business buying and selling properties but instead of buying property with your own money, you just refer people that also want to buy properties to your favorite broker. Of course you make a deal with your broker first that you get a referral fee for every successful sale the broker makes off of your referrals. Now, depending on how you advertise and market yourself, there is virtually no cash out, and when and if your broker closes the deal for you, you get a referral fee — Cash In.
Another example of a “positive” cash-flow business would be to get into the party planning (events management) business. You meet with the client to make a presentation on what the client wants for their event, if they like it, they hire you, and give you a down payment of 50% or even more (Cash In) you use that down payment to mobilize and make down payments to other suppliers (Cash out) and of course a week before the event itself, you get the full payment and with it comes your profit (Cash In).
Businesses with “positive” cash-flow not just removes cash flow problems but also removes risk immediately and more importantly adds to your cash in the bank immediately.
Can all businesses have the positive cash-flow model?
Unfortunately, not yet, but times are changing. It used to be, that “positive” cash flow businesses were limited only to service based businesses, but now even non-service based businesses and retail based businesses are getting into this mindset. More and more, retailing of products are now cash first, deliver later thanks to the many “market places” on the internet. Amazon, Ebay, Multiply, even Sulit.com.ph are fantastic places to start your retail business with “positive” cash-flow.
In the end, your business idea is a good first step to start a business, but before you plunge into it, answer this question: is is a “negative” or “positive” cash-flow business?
All the best to you and see you at wealthflowproject.com
Mark So is a fervent businessman, Investor and educator. He is the Chairman and CEO of Businessmaker Academy—a business, finance and corporate training center. He is the founder and Chief Forex Trainer of Forex Club Asia, A Trading club of Forex Traders across Asia. He is also the Founder and Chief Trainer of the Philippine Franchise Institute which specializes in training and growing existing Franchise businesses. Mark, together with his loving wife also created wealthflowproject.com a website dedicated to teaching people how to make money run after you. A sought after speaker for business, investing, You may email your comments and questions to: email@example.com or call the office at 6874445 / 6873416 / 6874645 for a schedule of his seminars