Managing Cash Flow
How to Make Your Business Financially Fit
I see it all the time - owners of small and growing businesses
think their companies are doing fine because sales are increasing, profits
look good, and new customers are knocking on their door. Yet many of these
owners end up without any money and they can't pay their bills. Why?
More often, a financial crunch means that business owners
failed to read the telltale signs of potential problems soon enough. Cash
was not managed properly.
Change your thinking about cash flow. About 98 percent of
small business owners devote too much time on generating sales and profits,
because that's what they believe will keep their businesses growing. Instead,
they should be concentrating on cash flow and learning how it affects
their businesses.
Message: Don't treat cash flow management as an afterthought.
Your ability to maintain an adequate level of cash and to anticipate when
capital will be needed can dramatically affect your business growth, your
competitive advantage in the marketplace - and your survival.
Avoid putting money into things that don't help your cash flow.
For example, avoid falling in love with pet projects, products, services
and customers that don't substantially help your cash flow. Avoid paying
generous salaries and big bonuses to key employees. Instead, consider
creating a "pay-for-performance" plan or establishing an equity program.
In short, you must uncover and prune every dollar of capital that you
invested or committed that does not lead to a steady cash flow.
Project and monitor your cash flow. Most often, a financial crisis
occurs because a company does not spot the signs of emerging cash problems.
For example, your business could have excellent sales, profits, customers
- and an income statement that looks good - but you don't have enough
money to pay your bills and employees.
A cash flow shortage can be a damaging blow to both start-ups and growing
businesses. If you are not successfully projecting and evaluating your
cash flow, you're putting your business in jeopardy. If possible, project
your cash flow weekly, monthly and yearly.
Plan now for future capital needs. If your growing business is
doing well - and you're projecting the need for financing in 12 months
- then you should be preparing now for that infusion of capital. Plan
ahead and establish a timetable. Don't wait until you need the money before
you start looking for it, since you could easily be saddled with a delay
in getting the cash. And that can generate a serious cash crunch or even
damage your business. (Note: For a newer company, a line of credit or
a small business loan could take months to be approved and executed.)
Look to the past for the future. You can help increase your success
rate if you stay in close contact with your cash flow statement. The past
can help predict the future. For example, if your business is established,
look at several years of cash flow statements for past performance patterns.
In general, your business will probably repeat the same pattern. Also,
note how cash came in and how it went out. Evaluate cycles, trends and
seasonal factors.
Keep your business alive. Tight on cash? If you can delay hiring
that new technical salesperson, then do so until your financial condition
is more favorable. If you need to purchase a major piece of equipment
before you'll have a chance of getting that big account, delay the decision
until you get an airtight signed contract from your prospective customer.
In short, if the decision is between a maybe - and the future survival
of your business, then the latter should be your choice. Your business
must be kept alive. Or as one accountant stated it: "Expenses you don't
incur won't affect your cash flow."
Work with a good accountant. Find an accountant who has experience
with small and growing businesses (especially in your industry or specialty)
- and build a close business relationship with him or her.
For example, have your accountant explain cash flow statements in a clear
and understandable language. Compare your cash flow statements to industry
benchmarks. Look for trends. Ask about ways you can improve your cash
flow picture. Get the best from your accountant's diagnostic skills. Too
many small business owners use an accountant only for financial statements
and tax services. What a pity.
Don't let cash sit idle. Your bank may be able to set you up with
a cash management program that lets you invest your idle cash, over and
above the required minimum balance for your account. In general, you can
move money between investments by phone or electronically or by an automatic
sweep program.
Establish priorities for investing excess cash. For example, allocate
some cash for next month's cash shortfall, and invest the balance into
a money market fund to help build for your future growth. Investing your
idle cash is a great way to make your money work harder.
By Richard Siedlecki. Reprinted with permission from PNC Bank
Serious about Small Business.
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