Many entrepreneurs and small business owners face cash flow problems. And all too often, they fail to notice these cash issues in time. According to Dun and Bradstreet, cash flow problems cause 90 percent of small business to fail.
Did you know you can have a profitable business and still run out of cash? I heard 60 percent of small businesses that fail in America were actually profitable at the time, but simply ran out of cash!
When you only focus on the top line – Sales – or only on the bottom line – Profit – and don’t pay attention to your Cash Flow you could end up in a pickle quite quick.
Do I need to say more to convince you that avoiding cash flow problems is a #1 priority for every business owner? Not without reason there is the saying “Cash is King”.
Cash flow is money flowing in and out of your business, measured over a specific period of time, like a week, a month, a quarter or a year.
In order for your business to be ‘in business’, you need to be liquid. Being liquid means to be able to meet your short-term financial obligations with ease – simply said: you are able to pay your bills on time, anytime.
One of the mistakes business owners make is that they confuse their bank account balance with cash flow. When they see money in the bank they assume it’s safe to spend it.
But your bank account balance reflects rarely your cash flow situation.
This is very important to understand, so I say it again: your bank account balance does not reflect a balanced cash flow situation.
It does not sound sexy but it is what you need, an emergency fund. Imagine the market has an unexpected downturn, you get sick and can’t work for a while or you have a family crisis that keeps you from focusing on your business. This emergency fund will protect you from a cash-flow crisis and gives you the liberty and leeway you need to get things figured out.
Always stash away a percentage from each Sale you make for rainy days. How big your emergency fund should be, depends on the size and nature of your business, but you should aim for 3-6 months worth of business expenses. Start small by putting away $1’000, then work your way up to $2500 and keep the momentum until you have the 3-6 months worth.
When you served your customer or client it is your right to send an invoice, better even make arrangements to send the invoice before you even have to do the work. If that is not possible, negotiate a deposit or a down payment at time of ordering and the remainder at time of delivery. You spare yourself from a lot of work monitoring your customers and their unpaid invoices. If you absolutely insist offering terms of 30 net then a rolling cash flow forecast is a must (see #4).
You might be all puzzled now and think, what do you mean Conny, how could I spend money that isn’t mine?
Well for example if you have to charge VAT (value added taxes, GST, PST or HST in Canada) to your clients. That portion of the cash coming in is not yours, you are just the collector for the government. Best is to not spend that money at all until you have to fill out your declaration and pay it to the government. But I hear of quite a number of entrepreneurs and business owners that get themselves in a pickle because they had spent that money and are then not able to send it to the government when it’s due.
Another way you are spending money that is not yours is by using your credit card as if the credit limit were your money. I my eyes the purpose of a credit card is not to give you credit or pay for something that you otherwise could not afford. A credit card is just an easy and widely accepted payment method. I always make sure I have the amount sitting in my bank account and can pay off the credit card balance at any time. (I wrote more in depth about credit cards here).
A cash flow statement shows the movement of money in and out of your business over a specific period of time, like a week, month, quarter, or year. It not only shows you what cash is left at the end of the month but also the amount that came in and went out of your business. While a cash flow statement can provide you with very interesting insights, a Rolling Cash Flow Statement is even more useful in my opinion.
A rolling cash flow statement does not only show the past or the present, it also focuses on the future. You can set one up for your business quite easy. I suggest you start with one for the next month and once you got used to the process you extend the period to at least the next six months if not 12 months.
You can do it by hand with pen and paper or (what I suggest) you use a spreadsheet. If you want to have access to it from anywhere you are then a Google spreadsheet would work fine or an excel spreadsheet saved in your dropbox folder.
Record/enter the amount of cash at hand you have right now. This includes any cash, money in your bank account, and in your paypal or stripe account.
record any cash inflows for the next month (quarter, half year or year) like Sales, customer payments, Affiliate payments etc. Now here is what is important: you have to record the cash inflows when they actually will happen. If you offer 30 days net, then you have to record the incoming cash of that Sale in 30 days from the date you made the Sale.
Now you need to add the cash outflows, this includes bills you have to pay and any expenses you might accumulate on an ongoing basis for the next month (quarter, six months or year).
From now on, every time you want to spend a substantial amount, you consult your rolling cash flow forecast first. For example, you want to sign up for a signature program but you know you don’t have the money in the bank. What you might have done in the past is just sign up for the instalment plan hoping you could pay for the instalments when they came due.
Now with your new tool, the rolling cash flow forecast, you can quickly add the installments into your spreadsheet and immediately see the effect on your cash. If you end up with minus cash at any given time then you know you can’t afford to sign up for the program.
Update this spreadsheet at least once a week with all your new insights.
This means, you check what you expected as cash inflows and cash outflows and make any adjustments if the amounts varied in the past week. Then you double check your recorded future cash in- nd outflows and adjust where necessary.
This one simple weekly task will eliminate a big portion of cash flow worries and anxiety, Isn’t that what we all want, to be able to focus on our passions and why we are in business in the first place.
Now over to you, have you ever faces a cash-flow crisis and if yes, were you prepared for it and how did you get out of it. I’d love to hear from you in the comments below.
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