Cash flow, love it or hate, it can give, and it can take away, fast! It happened to me and many people I know. I’ll never forget the feeling. After over 20 years in small business, the feeling never totally goes away. There is always something that can keep me awake at night. This is especially true when it comes to cash flow. I get so wrapped up in all the routine tasks I do daily, that controlling the cash that runs through my business becomes an afterthought. Cash flow management is a forgotten discipline by most small business owners. Although you can feel like you don’t have enough cash, by the time you see it on paper; it’s usually too late.>> Join us on April 27th for a WOWbinar – The Speed of Cash – How a Smart Accounting Pro can Spot and Avoid Client Failures.
My new passion is to eliminate cash flow problems as a reason that businesses fail. To be successful, I must help others see the problem, before they feel it. To get the conversation started, here are five situations that contribute to cash flow failures.
- Low sales: Of course, this is at the top of the list. Cash flow is dependent on profit, specifically gross profit. Gross profit is the most important number on any income statement as that is the amount of money you have to spend. Your operating expense is the amount of money you spend. Therefore, you should generate enough gross profit to cover your operating expense at a minimum.
- Not getting paid: This one seems so obvious. I did the work. I sent an invoice. Now I should be paid. Unfortunately, business doesn’t always work like that and clients don’t always pay when they are supposed to. Knowing the status of open invoices is critical to managing the speed of cash running through your company. The more often you ignore it, the bigger contribution it will make to your failure.
- The Financial Gap – In versus out: Too often we think of accounts payable and accounts receivable as independent functions of business. But there is a powerful relationship between the two that can identify a financial gap for the company. The financial gap is discussed in terms of the number of days between waiting to collect payment and making payments yourself. This financial gap must be covered with cash, so you want to have the smallest number of days possible. Too large of a gap will consume all your company’s cash.
- Surprises: If it’s not your birthday, chances are you hate surprises. Bad news does not get better with time. So, if I wasn’t going to be able to make payroll in 2 weeks, I’d rather know now than the day I cut the paychecks. Knowing about potential cash flow shortages in advance is the key to not experiencing them.
- Wasting Money: If money is going to be wasted, do it on vacation with your personal funds. A business should be designed to generate cash, not consume it. It happens all the time. Expenses creep up and we don’t check in with our vendors. Some expenses you can “set and forget”; however, most expenses should be evaluated on a regular basis. You may find out that vendors have raised prices and made themselves uncompetitive. Identify those expenses that have crept up and act to bring them back in line.
Your business needs cash to survive; and understanding the dynamics of cash flow can increase the likelihood you will stay in business. To help you understand cash flow; join us on April 27th for a WOWbinar – The Speed of Cash – How a Smart Accounting Pro can Spot and Avoid Client Failures. We will discuss the key components of cash flow and introduce a revolutionary new cash flow tool to help you see issues faster, act sooner, and avoid failure.
Check out CashFlowTool.com now. You will LOVE this tool!
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