Today's declining economy was the catalyst for this article, part two in a six part series, about the financial terms you need to know if you want to start a business.

Some people, after being laid off and unable to find a new job that pays what they need to maintain their lifestyle, are abruptly being forced into the entrepreneurial world unprepared. In other cases, they’re trying to supplement their income in today’s inflationary economy, while for others, it's just a dream they’ve always had.

Regardless of the reason, this path can lead to tremendous financial rewards, but only if you first understand the financial principles that go into building and running a successful business.

My last article covered profit, which is required for a business to continue to exist, and for today’s topic, we’ll be addressing cash flow, which is the first part of the profit equation. Where profit is the difference between revenue and expenses, cash flow is a measure of the flow of income into your business, and in some ways, this can be even more important than profit.

It’s critical to understand your cash flow—both current and projected, because how revenue flows into your business plays a huge role in how your business needs to operate.

One factor here is your industry.

Some fields, like construction, real estate, and transportation, have longer cycles, meaning you’ll receive larger chunks of revenue less frequently, while others like retail sales, plumbing services, and consulting, tend to receive revenue in a more frequent and stable cycle. You need to know what to expect, both to effectively manage expenses and to forecast future projections.

Shane Carter, Founder of Terra Nova Land Development, says knowing this is a critical component in starting a business. Carter’s firm is known as a go-to source for larger home builders in need of land for their developments, and prior to that, ran a large real estate development company, giving him a range of expertise on this topic.

 “When you close the deal on a construction project, you don’t get the full amount up front. Instead, it’s broken up into smaller incremental payments called ‘draws’ for different phases of the project. This is true whether you’re building a single family home, a 50-story skyscraper, and anything in between.

If you haven’t planned accordingly or you face unexpected delays, it’s easy to find yourself in a situation where you’re using funds from one project to cover expenses for another, as many contractors do. This shell game can land you in some serious problems if anything falls through and you no longer have the necessary cash flow to continue working on your projects.

But on the other side of the coin, you may be in an industry that doesn’t operate like this where an upfront payment in full may be standard, as is the case in our land operations. While that may seem to be a perfect scenario, there are pitfalls to look out for here as well. For example, if you don’t adequately plan your budget, you may burn through that capital before finishing the project. This can quickly paint you into a corner where you have more work than you can handle but not enough revenue to continue operating. These scenarios can destroy a business virtually overnight,” he explains.

Another factor is the clients you serve. In my business, I deal with individuals, businesses, and government entities, and there’s a different cash flow cycle for each. Individuals pay at the time of service, businesses typically pay within thirty days, and government entities often pay 60-90 days after service has been rendered.

These are generalizations, but of course there will be some outliers. Walmart, for example, sets aggressive payment terms for most of their suppliers, forcing them to basically act as a defector lender to the retail giant. This is critical to know because it can change your profitability and even your ability to keep your business afloat if you don’t adapt accordingly.

For example, you need to account for any interest charged on credit that you need to carry a deal from closing to being fully paid for and a lot can happen to your client in the meantime. What happens if they’re on 90-day terms, and they declare bankruptcy two and a half months after you’ve delivered your products? If you hadn’t prepared for this potential outcome, you could end up falling behind on your own expenses soon after.

Cash flow is also affected by seasonal cycles, in some cases. For example, businesses that rely on the resort or travel industry may face unexpected lulls in business during a particularly heavy hurricane season, which can have a dramatic impact on your cash flow. It’s good to plan for these unexpected, but potential seasonal issues that may arise in your industry.

And let’s not forget market conditions. When the economy softens, bills often get paid later than usual across all industries. That’s readily apparent in consumer credit delinquency data, which consistently supports this.

That means some of your best clients could suddenly become slow payers, and your worst clients could become a dangerous liability. This is where effective risk assessment becomes critical. A weak economy necessitates stricter financial protocols and more frequent analysis to reduce the likelihood and impact of delinquent payments by your clients.

Newsmax columnist and economic expert, Dr. David Phelps has been sounding the alarm on our economy for several years, citing the U.S. trade deficit, inflation, and rising debt levels, and more recently, outlined the added financial challenges we will face due to president Trump’s proposed tariffs.

“Many of the products affected by tariffs, including raw materials and energy, are necessary to run businesses entirely unrelated to those products. As the cost of goods sold, also known as COGS, increases, so do the prices those businesses need to charge to remain in business.

As a consumer, this means you will pay higher prices for a lot more products and services than you probably realize. Inflation will be the first effect of the tariffs, but that will quickly ripple out into other aspects of the economy. As a result of growing inflation, the Federal Reserve will be forced to raise interest rates to force it back down — a necessary step to turn the economy around, but one that will also create significant financial pain. Higher interest rates mean credit becomes more expensive, so big purchases like homes, cars, and commercial buildings will slow down,” he explains.

Identifying the factors that can impact cash flow comes down to truly understanding your industry, and frankly, most people don’t. There’s both an art and science to this, and even experienced professionals will often have blind spots because unless they’ve run their own business in a particular industry, there are a lot of behind the scenes details they simply haven’t been exposed to yet.

In some of my previous business in new industries, I’ve failed to conduct adequate research and just jumped in. In every single case, those businesses failed, while the ones I truly understood before starting, have all thrived.

As an investor focused on buying small businesses, I’ve been working to become better at the process of identifying the factors that impact cash flow, and lately, I’ve been following the career and advice of Thomas A. Carver, who built the nearly $800 million private equity empire, Harrin Equity Partners, buying and selling businesses. His approach to learning an industry has saved me from several bad opportunities that likely would have become failed investments.

On truly understanding how an industry works, which enables you to more effectively predict cash flow, Carver says “Something my father told me when I was younger is, ‘shave with the lights on,’ and what he meant by that was to always be acutely aware of what’s going on around me.

That’s something I took to heart then, but it means even more to me today because every bad investment I’ve ever made started off as a great investment. This means that you have to really understand the business you’re investing in, and that requires deep knowledge on a visceral level. It also requires a deep interest, bordering on passion, because this is exactly what it takes to dig deep enough into an industry to see what others miss—that’s how you spot the opportunities and red flags.”

He sees knowledge is a powerful risk mitigation strategy.

“Risk comes down to two things: your understanding of the industry and your confidence in your ability to perform,” Carver explained.

While there is no way to eliminate risk, it can be reduced substantially with more knowledge.

At the end of the day, cash flow is the lifeblood of a business and in many cases, can be even more important than profit because it’s what keeps the business going.

Even the healthiest of margins don’t matter if you can’t cover your expenses. That’s why it’s critical to leverage all available data to plan for real world cash flow, and make accurate projections to adapt to changes as quickly as possible. This helps you to build a stronger, more resilient business, and will be more important than ever in the coming years as the economy further declines.

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David Bell is a serial entrepreneur, and is currently the CEO of the national workplace drug testing company, USAMDT, where they help employers create a safer and more productive work environment.