Understanding your company’s Cash Flow can be the lifeline to your success.
                                                                            -Dr. Paul J. Pavlik

You need to know where your money is going so that you can avoid a cash crunch, or worse, a catastrophe of much greater proportions -- for example, an entire business financial failure.

If there is one thing that can make or break your company, especially when it is a small business, it is how well you manage your cash flow. For the majority of small companies that go out of business, most of them were profitable; they got in a cash crunch, there was no contingency plan in place, and they were forced to close. If you pay close attention to your cash flow and thoroughly evaluate its status at least once per month, and preferably consider its general status every single day, you will have an edge over almost all your competitors, and you will keep growing while other companies fall by the wayside. The amount of attention you pay to cash flow can literally mean the difference between the life and death of your company.

The Basics

What does "Cash Flow" mean, anyway? The simplest way to imagine the importance of cash flow is to think of the balance in your checking account. Will that balance be enough to pay your bills when they come due? It is a simple fact that the further out you can predict your bank balance, the further out you can see problems and the longer you have to prepare for and to deal with them.

Once you understand the importance of knowing your current expenses and having the ability to forecast the next several months, add in the revenue that you believe you will receive, and then do the math. Cash Flow management is simple in concept, but it can be complex in execution. This is true partly because it is difficult to decide how to get started (especially when trying to develop a forecasting mechanism), and partly because it takes serious discipline to consistently look at this when there are often more interesting things (at least in your mind) vying for your time.

An Ounce of Prevention …

There are a couple of ways to manage Cash Flow: prevention (e.g., managing the business in such a way that you can foresee problems coming and can deal with them early on) and cure (e.g., dealing with problems after they surface). After all, would you prefer catching strep throat, taking antibiotics and supplements to cure it, and stay home to recover, OR would you rather prevent strep throat by avoiding exposure to others that have it and take supplements to build up your immune system? Prevention is by far the best option. If you plan ahead and look for problems as far out as possible, you can avoid many of them and lessen the severity of the ones you cannot avoid.

In the end, if you have worked hard on prevention but still find yourself with an unexpected problem, what can you do about it? If you have not been planning for a possible cash crunch, you may face some painful choices: (1) borrow from your personal funds – a very uncomfortable solution, (2) delay paying some vendors – they depend on your payments to keep their own businesses afloat, (3) delay payroll – this is NEVER acceptable, (4) try to convince your customers to pay their bills early – customers rarely want to pay for services in advance of “seeing the goods,” etc. Start taking the responsibility of paying your employees, vendors, and debtors ON TIME. The old adage of “pay yourself first” DOES NOT APPLY when others’ businesses, families, and well-being depend on you meeting your obligations.  

A much better solution is to have a close relationship with your banker. Do not make the mistake of treating your bankers as outsiders; treat them as your “partners.” You do this by sending them frequent and current financial reports along with forecasting reports for upcoming months. This shows the bankers that you really have a handle on the financial health of your business. The more a banker knows about your business and, more importantly, the more he thinks you know about your business, the more confidence he will have in you, and the more willing he will be to help out if you get in a cash crunch. Another important tool is a line of credit (LOC) from your bank (think of this as business overdraft protection for your checking account). Ideally, the best time to look into this is when your business is flush with cash, not when you are desperately in need of the money. Then, if you have an LOC in place, and Cash Flow becomes a problem, for example, the economy is slow, customers are slow to pay, etc., you can draw on the LOC until the economy improves and your invoices start bringing in past-due revenue.

The bottom line with Cash Flow management is to develop the tools and discipline to manage it consistently, to look for problems as far into the future as possible, and to set up a good plan for dealing with the problems you cannot avoid.

Measuring Success

Be certain that you have a tracking system in place to monitor and forecast your Cash Flow. You will want powerful cash flow spreadsheets that track every penny that comes in and out of your company.

For a sample of a Tracker Enterprises’ Cash Flow spreadsheet or how Tracker’s unique operational management and forecasting tools can help your business prepare for a successful financial future, call us at (719) 592-0878 or send an e-mail to This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . Feel free to forward this Tracker Tips e-newsletter to friends, family, or business acquaintances. We welcome anyone to our mailing list, so invite colleagues to send their e-mail addresses to This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .
Thanks to the valuable ideas of Keith Lowe. He is an experienced entrepreneur who is a founder and investor in companies in several industries.
 
The opinions expressed in Tracker Tips E-Newsletters are those of the author. All of the information contained herein is intended to be general in nature without regard to specific types of businesses, geographical areas, or other circumstances, and should only be considered after consulting an appropriate expert, such as an attorney or accountant.