Running a small business is a lot like getting water from a faucet by using a bucket with a hole in it. The faucet represents the incoming cash flows of the business. This is the cash flow generated by the sale of goods and services. The hole is the expenses of the business, the raw materials that must be paid for, the salaries for staff, and of course the rent and the utilities. The water in the bucket is the liquidity of the business. The amount of liquidity determines the usefulness, or the value of the bucket. If there is liquidity, the holder of the bucket can use the water to quench their immediate thirst, water a garden that will bloom in the future, or even put out a fire if such an emergency arises.
The greater the amount of water in the bucket, then the more varied the uses it can be put to – including saving it for a rainless day when the faucet is dry. However, if the bucket is dry because the water leaks out of the hole faster than it comes in from the faucet, then there is a problem. Either the hole needs to be made smaller or a faster running faucet needs to be found. An empty bucket without water is not worth much. The smart small business manager is always conscious of the water in the bucket.