Other than the dreaded words, "We're being audited," there is no situation more frightening to a business owner than these "We have a cash flow problem." I just heard about one small business here in Iowa that is having such a problem, which looks to be temporary. But what is a "cash flow problem," how do you avoid it, and how do you get out of it?
First, understand the phrase "Cash is King." You can make a "profit" on paper and still run out of cash. And, as someone once said, "when you run out of cash, they take you out of the game."
What is cash flow? Cash flow is the amount of money (cash) coming into your business from sales, interest income, investments; and the amount of cash leaving your business in the form of payroll, mortgages, loans, expenses. The rule is simple - more money must be coming in than going out.
Short Term Cash Flow Problems
Cash flow problems can be short-term and temporary, like the example I noted above. These cases are like "acute" appendicitis; they can be fixed quickly. In these cases, a business has an order from a customer or is planning for a big sale, and they must spend money initially in anticipation of income later. Financing temporary cash flow problems can be accomplished by:
- Putting expenses on your business credit cards
- Persuading suppliers to take money in a payment plan
- Selling some inventory
- Improving your collections management system
- Getting a short-term bank loan or line of credit
- Selling receivables to a factoring company
Continuing Cash Flow Problems
Long term continuing cash flow problems are usually the result of inattention on the part of the business owner, who isn't reading reports and checking balances. These cases are like a "chronic" illness. There are only a couple of ways to solve chronic cash flow problems:
- Lower your expenses permanently by laying off employees, cutting out product lines, or scaling back your facilities costs (moving to a smaller location, for example)
- Increasing your income
- Finding financing, usually from private investors.
Keep Your Eye on Cash Flow
The only way I know of to avoid cash flow problems is to be watchful. For example:
- Get your CPA looking out for your cash flow situation, making recommendations about saving taxes (which will reduce your cash needs) and savings on other costs.
- Review your financial reports regularly. Look at your balance sheet and P&L/Income Statement monthly and watch for "red flags."
- Project cash needs out 6 months or more. Even if today looks OK, you may find that 6 months from now you don't have enough to make your payroll. You know what your fixed expenses are, and you can make some estimates on income; look at these two factors over time to make sure you're prepared. Thinking ahead gives you time to remedy the problem.
If you don't like doing the books or thinking ahead, find someone who does and have them give you reports. Cash flow is one of those classic cases that proves the saying, "Failing to plan is planning to fail."