A business has three financial components, the seed capital that helps start it, the cash flow that keeps it going and the profit that is generated. Seed capital can be obtained in the form of bank loans or personal loans. Cash flow largely depends on payments from customers.
Cash flow is basically exactly what it means, the flow of cash. This is required to keep the company operational and goes towards production as well as overheads, salaries etc. It is a vital factor in running a business, as more going out and less money coming in could result in a system breakdown!
There can be a gap between sending an invoice to a customer and receiving payment and this time gap could be quite crucial, especially for a small or new business. When margins are narrow, how can you keep a business afloat while payments are not in? There are ways such as invoice discounting to help solve this problem.
What Invoice discounting basically means is that an external finance company will pay you a large part of the expected incoming money in advance, for a fee. And when the customer makes the payment, it goes to the company, and balances are settled. This gives you cash when you need it and is essentially like borrowing money against the customer's payment.
Understanding the financial aspects and ground realities is important for any new business. Poor cash flow is often the reason why many new businesses fail. Fortunately independent financial institutions and banks offer help in the form of various products to new enterprises.