Cash Flow

Cash Flow

Your Cash Flow sets out the flow of money into or out of your business, project, or financial product. In business cash flows are essential to solvency. Your cash flow can be presented as a record of the past, such as the sale of a particular product, or forecasted into the future, representing what your business expects to take in and to spend.

For the good running, survival and success of a business, proper cash flow management is important. but every year, thousands of otherwise viable firms go under because they run out of ready cash by failing to manage their cash flow. Crises like this are entirely predictable and completely avoidable.

Without positive cash flow, your business will not be able to meet its financial obligations, thereby leading to a cash crunch or bankruptcy. The key is to plan ahead and forecast the flow of cash in and out and it is actually surprisingly easy to do this.

Cash is not the same as sales, and people do not pay you until long after you’ve had to pay for wages, stock and materials. Other demands, like tax, seem to build up then hit you with a bang. Unless you’ve put aside sufficient cash for these, you are in trouble.

Cash Flow Forecasting

Very simply cash flow forecasting is the process of estimating all incoming and outgoing cash, and converting this into a month-by-month projection.

Lay out a simple grid with columns across for the next twelve months and list down the side your income and expenses. Total these for each month to see your net inflow and outflow.

Spreadsheets lend themselves to cash flow forecasts but you can also do them on paper. If you use a spreadsheet package, do some back-of-the-envelop checks to ensure your formulae are correct. Many banks have suitable ready-made paper forms you can use or templates for spreadsheets. Forecasts rely on your knowing when cash comes in and when it goes out:

Cash in

Put down your current cash in hand or in the bank. List all the money that you expect to receive this month totalled under headings like cash sales, credit sales, cash injections.

Remember, we are talking about cash not sales. So include income due from credit sales made in previous months. Exclude orders in hand and invoices waiting to be paid.

Now repeat the process for each month, again working with expected actual income rather than orders. Take your sales projections and allocate how much will be paid at once, and how much one or two months later.

Do not worry too much about being exact. The further ahead you forecast the vaguer estimates become. Most businesses just need a fairly accurate two-month figure and a rough twelve-month forecast. Lenders may want to see a two-year summary.

Cash out

Now list your outgoings for this month. Some things are predictable: rent, lease payments, wages and drawings (for your personal expenses). Also list outstanding invoices due for payment from previous months.

Charges for variables like phone bills and post are slightly harder. If you have no previous figures to go on, make a realistic guess. List other expenses you will have to pay cash for this month. (Items bought on credit or with a credit card will appear next month.) Extend these figures for the following months as best you can. Remember tax, which will depend on projected sales.

Stock up

Next calculate what you will need to pay for stock or material, and when, again based on your sales projections.

Start the sweep

Now comes the fun bit. Add up the first month’s outgoings and subtract them from receipts. This shows your cash surplus (or deficit) for the month. Add this figure to the cash-in-hand to give your expected cash position at the end of the month. Repeat this process for each month. Warning signs are continuing deficits and a negative cash position.

Judge your income

Planning your sales levels requires market research and past experience. Err on the side of caution. Sales will also depend on your marketing efforts, staff levels and production capacity. These all involve cash outlay before any income comes in.

Record any assumptions you make in your forecasting, such as how long you expect customers will take to pay you. If you offer 30 days' credit but they take around 45 days to pay, your figures will be badly out and you may not have enough cash to keep going until you receive those outstanding payments.

Introduction to the Cash Flow Statement

Financial Literacy

Cash is not profit

If you buy something for $50 and sell it for $60 you make $10 profit. If you pay your supplier in June but do not sell the product until September, and then don’t get paid until mid-November, you have a $50 deficit for five and a half months. That $10 profit could have been eaten up in overdraft interest. That’s why fast, under-capitalised expansion can be fatal. Many a business fails despite a full order book. payments

Capital Expenditure

Your cash flow forecast is a big help to manage big, one-off payments, like your insurance premium or tax bill. These may fall in your low season, when cash is short, so you must put money aside for them.

Remember why you’re doing it… A good cash flow forecast will reduce one of the biggest threats to your business and greatly increase your chances being around this time next year.

Any business owner always gets that sinking feeling that whilst they are cost-conscious; most of their people are not. And yet when the inevitable moment comes when “someone has to go” suddenly everyone becomes aware of all the ways the business has been wasting money.

The trick is, therefore, to get your people saving costs without it becoming an issue and before you have to start cutting staff numbers.

Here are 50 ideas which, when implemented, will surprise you in just how much you can save.

  1. Set staffing levels to cope with normal work levels. Hire temporary staff for peaks rather than increasing costly over-time. Temporary staff are always available, usually cheap and when you do not need them cost you nothing.

  2. Offer unpaid leave. People do not want to lose their jobs through redundancy and you do not want to use valuable staff. There is a great interest in putting family first these days and it may be that if business is stagnant a compromise can be reached.

  3. Cut working hours. It is hard to get the right people, so keep them. Take the time to talk one-to-one to your staff and clearly set out the issues, it is remarkable how many will respond.

  4. Do not replace staff immediately. It is sometimes difficult to work out exactly how important a member of staff was until they go. Rather than instantly replacing them, try without. You never know, and this is particularly true of that vital employee who suddenly leaves, how well you can do without them.

  5. Hire staff cheaply. Job centres, unemployment bureaus, free newspapers, local college notice boards and talking to the staff you already have often attract just the right person and for little cost. Do not just reach for the telephone and talk to the first agency in the book, think of other options first.

  6. Change working hours. It is astonishing how certain we are that 9-to-5 is best. By staggering your hours you can cover the same tasks and have an office presence early in the morning and deep into the night. Why does your wages person or your factory staff have to work during the day? Many companies can exist on cheaper part-time staff, be open longer and increase productivity by avoiding the 9-to-5 routine.

  7. Review your lease. Is your rent review a one-way option? Why? Insist on a two-way review, insist on all repairs being done, insist on all your rights; if your landlord does not want to meet all the terms, how much are they willing to reduce your rent, the average is about 13%.

  8. Sub-letting rights. Get them and use them. If you have a part of your business that is stagnant or losing money, filling the area with a rent paying tenant is an easy way out.

  9. Appeal against your business rates. All your taxes are open to debate, and yet very few debate them. Burglaries up in your area, how much off of your taxes so that you can improve security? Garbage not collected, street-light not working, staff continually late because of traffic problems? Why should you pay twice?

  10. Find alternative accommodation. If customers do not visit you, find the cheapest accommodation you can. If they do, find “somewhere nice” to see them and move everything else to a cheaper alternative. Expensive premises are not always necessary.

  11. Appoint a purchasing person. Choose somebody to handle the purchases and ensure they get as many quotes as possible and ensure they know how to negotiate, not argue, negotiate. Do not allow any manager to purchase; you will lose money time after time.

  12. Someone else’s new business. Take a look at the job advertisements for sales people; most businesses want people who can generate new business. Companies pay a fortune and many lose money on getting new business, so move on from your old supplier, and become someone else’s new business. You will save a fortune.

  13. Reduce purchasing administration. Why are you spending money looking after someone else’s business? Do not pay people to check goods-in, purchase orders, reconcile to invoices and all the other things you probably do. Get a simple system in place and check the purchasing once.

  14. Complain. If they only sent 99, complain. If they promised by Tuesday and delivered Wednesday, complain. Whatever your supplier did that did not meet what you expected, complain. And establish the value of each complaint.

  15. Buy with others. Talk to your friends, other business owners, and the people at the golf club or the gym. Go to your local chamber of commerce, people will be buying the same stuff as you and together you will both get it cheaper.

  16. Old ways, new technology. Rather than spending a fortune on a web-site think about the real advantages of the web. You can correspond for nothing, you can receive orders, you can place orders, and you can supply documentation and a whole lot more and all for nothing. Use it to save money.

  17. Utility costs. It is a certainty that you can reduce your utility costs. Do not pay someone to find out for you and take half your savings, do it yourself.

  18. Office expenses. Why are you paying to keep desk areas tidy, your staff should do that themselves. Make your staff responsible and cut your bills in half by having the cleaner every other day.

  19. Telephone bills. You can save hundreds, if not thousands of dollars with just a few simple rules. No personal calls to mobile phones. Use e-mail rather than the telephone. Change your documentation to put the onus on people to call you. In particular ask suppliers to ring and check if you need something, say, once a day or week. Use the telephone bill to identify telephone abusers; some of your staff may cost you double their wage in calls.

  20. Software licences. The average company is paying about 40% too much in licences. Ensure that you need the software you are paying licences for and ensure that you are paying for the right number of licences.

  21. Car trade-ins. Why not trade-in one year later than you do at the moment, which normally means a saving of 33%.

  22. Review business trips. Investment in videoconferencing and computer conferencing pays for itself remarkably quickly. Business trips cost money and take a long-time in these days of congested roads, stations and airports. Make the other person pay for the trip by inviting them to see you at your offices.

  23. No-frills travel. Who cares how you got there? Too many businesses use first-class travel and first-class hotels when there is no need for it. Budget airlines and smaller hotels can be just as comfortable and certainly just as efficient, save the “better” options for your personal travel when you can spend all the extra money your business is now making.

  24. Seek volume hotel discounts. Find a small chain of hotels and negotiate a block discount.

  25. Set subsistence allowances. Set a rate and set out what it covers. Pay your staff for the inconvenience of being away from home and they can use that money to pay for their own newspapers, meals, drinks and late-night movies.

  26. Use the Internet internally. Your staff can submit expenses, reports, orders and just about everything else via the Internet and it saves time in re-punching and processing.

  27. Send invoices daily. Find a way to bill everything on the day it happens. The average business takes a week to invoice, how much does that cost you in interest costs and efficiency?

  28. Improve credit control. No sale has taken place until it is paid for. Credit is a privilege, not a right. Do not allow your sales people to sell to companies who persistently pay late. Work out how much it costs you in interest, telephone calls, letters and arguments between sales and accounts staff when someone persistently pays late. If your sales people are good, tell them to find other customers. Every business that ever failed has enough cash owed to it by bad payers to keep going, for a little while longer anyway.

  29. Reduce audit fee. Ask your auditor what you have to do to reduce the audit fee, if they cannot suggest anything go somewhere else. If they do, then do it, and pocket the savings.

  30. Bank on-line. There is no better way to understand cash flow than having instant access to your account on-line. It brings the account under your control and is also useful for finding out about bounced cheques and additional bank charges, and doing something about them, that much quicker.

  31. Always pay cheques in on the day. You will be surprised to find how many times you do not.

  32. Review marketing costs. People always talk about cutting or increasing marketing costs; very few measure them. How much did you make on your last mail-shot or advertisement? How many people see the car with your logo, how much does each salesman actually make you and so on. Measurement not only will enable you to find out how much you should be spending, it will also make your sales and marketing people work that little bit harder as you are watching.

  33. Review your database. Marketing to people who have moved is a costly business. Once again e-mail is a great way to save money as you can use it to check who is still there. You may even use it for direct mail although experience suggest that it is rarely as successful as old-fashioned “snail-mail”

  34. Stop making expensive brochures. Brochures are a breath-taking waste of money for most businesses. The moment they are finished they are out-of-date. Once again the web is a great place for keeping people informed and it costs no more to have an extravagant brochure than a cheap-looking one.

  35. Spread the marketing costs. You will be amazed how few people try joint marketing with their supplier. Why not try it? It is obviously in their interests if you sell more. What about marketing with another company offering a joint solution, you have a product they have an add-on, the only way the customer can get both is to buy from you both.

  36. Shop around for printing. The quality of work done by copywriters, photographers, designers and printers rarely differs, but their prices will when they know you are shopping around.

  37. Review frequency of sales calls. How many calls to get an order? Don’t know? Then find out. A remarkable number of businesses call customers every week when their customer orders every two weeks, three weeks or monthly. Why?

  38. Your best customers. Do not fall for the new business is best philosophy. Your best customers are your current customers. Treat them as you would a potential big prospect, you will be surprised how much business is out there with the people you already know.

  39. Commission on poor sales. What happens when your sales people do not hit target? Very few companies take money back, but introduce a two-tier system, commission for good months which increases as the number of good months do. If someone hits target every other month they are manipulating your present system, give them the opportunity to earn more money for consistently performing well.

  40. Review sales targets monthly. Do not drift. Sit with your sales team once a month and set targets that are agreeable to you both. Do not allow your business to become one of hope or one dominated by easy or hard targets.

  41. Eliminate waste. Whether you produce goods or not, eliminate waste. That is not the materials you cannot use, but processes. Do not use suggestion boxes, go and ask everyone, what are they doing that they regard as a waste; they will certainly tell you.

  42. Do not manufacture. A remarkable number of businesses would provide products more profitably if they did not make them themselves. Your business may have a great reputation and great sales people that can sell well in your market, so do you have to make it yourself?

  43. Use your machinery. Every minute your machines are not working they are costing you money. Can they make other things, can you sub-contract them, and can you work them 24 hours a day?

  44. Manufacture just-in-time. When you next look at your stock convert it to dollars in your mind. Having a lot of stock is not good business practice; it is a cash flow nightmare.

  45. Distribution is key. Get your distribution right. Get the right product delivered to the right customer at the right time. The second time you deliver something is the time you spend all your profit, the third time and it is your money you are spending.

  46. Forecast. Start by estimating how much you will have in the bank next Thursday. How much stock of a product at close-of-business Friday. Estimate your sales for tomorrow and two weeks on Wednesday. You can learn how to forecast more accurately very quickly by this approach. Now imagine the benefits of knowing how much you will have in the bank next Thursday and what your sales will be two weeks on Wednesday.

  47. Business Alliances. Two heads are better than one. Most people are terrible about working with other businesses and the loss to both businesses is enormous. Share marketing costs, increase sales opportunities and improve the chances of better funding and opening up geographical opportunities.

  48. Outsource your services. Book-keeping and distribution come immediately to mind. Always set out, in a contract, what they will do for you. The key saving is that they will only work for you when there is work.

  49. Sell your business. It is remarkable how many people wait to sell their business until it is bankrupt, or they are too ill to run it or they just cannot take the stress any more. There is nothing better than buying fresh bread; no-one wants it a week later.

  50. Consultants? Consultants borrow your watch to tell you the time, we should know! If you are going to use them ask them to charge by results, the consultants who will be good for your business will soon emerge then, as they are the only ones who can afford to take the chance.

Cash flow is an accounting problem, the sales team do not need to know about it, seems to be the philosophy that destroys many businesses - but a sale is only a sale when the customer pays.

Most companies regard cash flow as a mathematical exercise only. We’ll just sell more and buy less or we’ll let a few people go seem to be the instant solutions. The difference between the companies who understand the intricacies between stock, debtors, creditors and taxation and those who don’t, is best reflected in the bankruptcy courts.

If you add up the amount a company paid for the stock it still has and the amount they are still owed by debtors, you will generally find that equals what they owe. I have been into companies where the accountant has produced numbers three months before showing the company had a cash flow problem. And often cannot find a single note in the management accounts or meeting notes where the subject had been discussed. It is a rarity to find a company that deliberately went under, the great majority had the information in front of their eyes, but the accounts say they are making a small profit.

The difference between a well-run company and another is often the emphasis the former places on cash, if companies look at cash flow before profit, they tend to have less stock, better paying debtors and a sensible commission policy for staff.

Tips To Improve Cash Flow

  • Make the first page of your management accounts, cash flow

  • Plan a reasonable turn-around for stock and off-load any that exceeds it

  • Stop giving free credit – a customer is not a customer until they pay – if you turnover $10M and reduce your average debtor days by a month, you will put about $1M in the bank – try borrowing $1M

  • Collect debts before they are due, by ringing and checking that goods are there, invoice has arrived, all agreed, do not contact them for the first time when it is overdue

  • Pay sales staff only when you are paid, you will find that you can increase your commission rates and retail sales staff longer

  • Don’t just set new business targets, set business retention targets – relationships are important, you spend enough money trying to get new ones

  • Get a decent web-site and e-mail facilities, the cost savings are enormous, and your communications improve instantly

The statistics on small business failure are alarming.

Do not let this happen to you.

Here are the rules to help you take control of your cash flow so you can create the business you have always dreamed of.

Running out of cash is the definition of failure in business. Make the commitment to do what it takes so it does not happen to you.

It is important to recognize that cash is what keeps your business alive. Manage it with the care and attention it deserves. It's very unforgiving if you don't.

Cash Flow - Cash Is King

Remember, Cash Is King, because No Cash = No Business.

What is your cash balance right now? It's absolutely critical that you know exactly what your cash balance is.

Even the most intelligent and experienced person will fail if they are making business decisions using inaccurate or incomplete cash balances. That's the reason why business failures are not limited to amateurs or people new to the business world.

The key to keeping an accurate cash balance in your accounting system is to do today's work today. When you do this, you will have the numbers you need - when you need them.

Here are simple rules to follow to make sure you have an accurate cash balance on your books. You do the work or have someone else do it.

Those are the only two choices you have. The work must be done. It's like mowing the lawn. You can't just ignore it. Someone has to do it. That means either you do it or you have someone else do it.

  • The bank balance and the cash balance are two different animals. Rarely will the two ever be the same. Don't make the mistake of confusing them.

  • It is futile (and frustrating) to attempt to manage your cash flow using the bank balance. It's a prescription for failure. You reconcile your bank balance. You don't manage from it.

  • What do you expect your cash balance to be six months from now? This one question will transform the way you manage your business.

  • This question really gets to the heart of whether you are managing your business or whether your business is managing you.

  • You would be shocked and amazed at the number of businesses that fail because the owner did not see a cash flow problem in time to do something about it.

  • The key is to always be able to answer the question - what do I expect my cash balance to be six months from now?

Cash flow projections are the key to making wise and profitable business decisions.

It's impossible to run your business properly without them.

Use these these laws to free yourself from cash flow worries. That way you can focus all your time and talents where you can make the most difference in your business.

No more wasted time worrying about what's going on with your cash flow. Instead, you can focus your unique talents and abilities each day on ways to grow your business and make more and more money each year.

And that's a recipe for success and wealth creation.

Cash flow problems are responsible for causing over 70% of businesses to fail within their first year. Consequently, it is the main reason for business failure.

Cash flow is the movement of money within a business, both income and expenditure, and is the key for business survival and growth.

Poor cash flow management has in the past, and still does today; put an end to some of the more successful businesses. It therefore goes to show that nobody is safe from the dangers of suffering cash flow problems, particularly as some of them may be unforeseeable.

Therefore, how can you ensure that your business develops and maintains a healthy cash flow now and in the future? One way is to be aware of the many dangers that can pose a serious threat of causing such problems.

It is becoming the norm for almost all businesses to offer credit to their customers (depending on your type of business) and so it is not surprising that this is one of the largest influences on poor cash flow. This is where a good management system needs to be integrated using budgeting and cash flow forecasts. More importantly, a good credit policy and effective credit control needs to be adopted. When customers fail to pay you back at the agreed time, it can have a major impact on your cash flow particularly if the money owed is a significant amount. This can leave you short of money at that point in time (and possibly for longer if the debt becomes an aged debt) and leaves you with the trouble of raising more finance to compensate for the delay in payment.

Failing to keep control of your debtors is one of the main causes of having bad debts and so it is important that you follow up immediately on any late payments. At the same time, it is important that you keep good relations with your customers, particularly the important ones.

Larger businesses have been criticized as they often 'abuse' smaller businesses offering credit by purposely delaying payments knowing that they will always be regarded as a 'major' customer to the business. A change in legislation has now allowed businesses to claim late payment interest from each other, which can also be charged to invoices that date back.

A business can use factoring to sell their debtors to a factoring company. The factoring company provides you with around 80% (varies between companies) of the value instantly where the rest is paid to you (minus the fee) when the total debts have been recovered.

Taking credit is always seen as a good thing as it means that your money stays in your business for longer and that you do not have to worry about paying until a later date. Everyone takes credit where it is offered, but having too many creditors can prove fatal particularly if you offer credit to your own customers.

Your payments to creditors may be dependant on whether your debtors pay you on time. If they don't, then it could result in you failing to pay off your debts and consequently you could be faced with heavy interest charges or blocked further credit giving you a poor reputation.


Borrowing excessive amounts of money to finance your business is a route that many new start-ups, in particular, have taken - and failed. We all know that borrowing costs money (mainly through interest rates) and so it is important that you acknowledge these charges (including terms and conditions) whenever you apply for finance.

Increased borrowing can lead to bigger interest rates and tighter repayment schedules, consequently reducing your control of the business. If you take out any secured loans, your security (be it your home, business assets, etc) is always at risk if you fail to meet payments.


Overtrading is caused when a business sells more than it is capable of selling with respect to its current cash levels. If payments are made precisely at the time of sale (i.e. no credit is offered), the risk of overtrading can be reduced. Where credit is involved, the effect it can have on cash flow can be disastrous.

Sometimes it costs to sell, i.e. for those customers that take credit, you do not have the money in your hand until it is paid to you at the agreed time (credit period). This may encourage the need for borrowing money through, say, loans or overdrafts to compensate. The pattern here is: more selling by credit leads to more borrowing.

This may seem normal to most businesses, but for those businesses that fail to meet payments on any money borrowed will face the consequences. Failing to meet payments may be influenced by your debtors failing to pay you on time…

Overtrading is more common with small businesses, particularly during their early stages where they seek and experience rapid growth: steady growth is the key.


If you have money in your business available to you for spending, you may immediately be tempted to purchase assets such as machinery, vehicles, premises, etc. This can often be a direct route to business failure. It is good management to have funds available at hand should any unexpected costs be incurred.

In conclusion, over-investing in assets can leave your business short of cash and further leave you unable to finance daily operations and unexpected costs (late payment interest, equipment breakdowns, tax demands, etc).

You should not see it as a shout to put a halt to your planned investments, but consider what you could possibly need the money for in the future. Budgeting could be the answer. If funds turn out to be not as favourable as first imagined, why not try leasing as an alternative to investing?

Holding Excessive Stock

Buying in bulk can seem beneficial at the time, but holding excessive amounts of stock ties up money in unproductive assets, particularly if the stock is not sold on quickly. If you stock raw materials and/or finished products, effective stock control is the key. The costs of storage can also add up and so such costs should be considered when buying in bulk.

Sudden Change in Demand

It has happened - and businesses have paid the price although many of these are no longer around to tell the story because of it. It may be that demand for your service or product doesn't vary significantly enough to dent your cash flow, but the possibility should never be over looked.

Although this issue can often be unforeseeable, it can be accounted for with appropriate market research and effective marketing to maintain a steady demand to keep your business successful.

Cash flow problems are the main cause of business failure to date. This fact is likely to stick as people still fail to adopt good cash flow management, but you can prevent being a statistic by understanding how poor cash flow can be avoided.

Management is the key and depending on what type of business you are in, different strategies and actions need to be taken to ensure your continued success. An effective credit policy and control are always at the forefront of maintaining a healthy cash flow but at the same time, you need to be aware of the hidden dangers of excessive borrowing and investments (for example).

Cash Flow - Forecasting and Budgeting

Forecasting and budgeting can be helpful to most small business managers where finances require tighter control and planning for future operations.

If there was a single thing that business tends to fall victim of, is it how cash flow is managed and controlled within a business. In fact It is believed that most businesses that stopped trading could have survived with their current level of trade had their cash flow been in better shape. Here are some common issues.

Most business will have busy times and quiet times throughout their year based on the type of business they are in.

However time and time again, I see sales forecasts that are exactly the same month after month which are based on the Company’s base outgoings rather than customer buying trends. In my experience the two don’t always match.

It is also important that you know when the money is going to come into your business and when it isn’t so you can plan for the lean times. It is equally if not more important to do the same with your outgoings. You will pay some bills monthly, but some larger ones are likely to hit you once or twice a year at specific times such as taxes, accountant fees, insurances etc.

Lean trading periods coinciding with expensive unplanned outgoings are a regular reason for businesses failing. Yet with a little bit of planning and reviewing previous years figures, the peaks and troughs can be leveled off. Write down in your diary or a specific planner when you expect the large bills and review your sales targets to suit actual buying patterns. Put all this information in plain view, so you are constantly reminded. Then if you need to, hold some money back for those leaner times. Easy but effective!

Another fact of business is the slow payment of invoices. Many businesses have failed owing money, but in reality had sufficient money owed to them to stay afloat. Getting paid is very frustrating and is a major factor of business life but there are some things you can do. Start by creating a culture in your business that states 30 days credit means 30 days, not 31 or a week later and stick to that culture for everyone. It is often those you have a close relationship with or have dealt with for years that can be the slowest payers.

Ensure they know the rules apply to them too. Businesses often choose which bills to pay each month based on how much hassle they get. Make your invoices the ones they want to pay. Consider offering a discount for quick payment, such as a percentage for payment within 7 days. You could charge interest for late payment, but this tends to annoy your customers rather than encouraging them to make a quick payment.

Finally factor in late payment into your cash flow planning so that no one payment takes your Business to where it doesn’t want to go. These small culture changes and disciplines can and will make a difference to the smooth running of a major organization to a one-man enterprise.

Cash Flow - Poor Cash Management

Business analysts report that poor cash management is the main reason for business failure. Poor cash management is probably the most frequent stumbling block for entrepreneurs. Understanding the basic concepts of cash flow will help you plan for the unforseen eventualities that nearly every business faces.

Cash vs. Cash Flow Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These can potentially be converted to cash, but can't be used to pay suppliers, rent, or employees.

Profit growth does not necessarily mean more cash on hand. Profit is the amount of money you expect to make over a given period of time. Cash is what you must have on hand to keep your business running. Over time, a company's profits are of little value if they are not accompanied by positive net cash flow. You can't spend profit; you can only spend cash.

Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most pressing management tasks for any business. The outflow of cash includes those checks you write each month to pay salaries, suppliers, and creditors. The inflow includes the cash you receive from customers, lenders, and investors.

If its cash inflow exceeds the outflow, a company has a positive cash flow. A positive cash flow is a good sign of financial health, but by no means the only one.

If its cash outflow exceeds the inflow, a company has a negative cash flow. Reasons for negative cash flow include too much or obsolete inventory and poor collections on accounts receivable (what your customers owe you). If the company can't borrow additional cash at this point, it may be in serious trouble.

A Cash Flow Statement shows the sources and uses of cash and is typically divided into three components:

  • Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It comes from sales of the product or service of your business, and because it is generated internally, it is under your control.

  • Investing cash flow is generated internally from non-operating activities. This includes investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.

  • Financing cash flow is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock, and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.

Cash Flow - Good Cash Management

Good cash management is simple. It involves:

  • Knowing when, where, and how your cash needs will occur

  • Knowing the best sources for meeting additional cash needs

  • Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors

The starting point for good cash flow management is developing a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual, 3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to understand how they used money in the past.

Cash management is ultimately about cash flow -- and very few small businesses are awash in cash. Even successful, growing companies are vulnerable to cash flow problems because they tend to add employees and inventory rapidly. This may quickly deplete the company coffers and lead to cash shortages.

Because having cash at the right time is so important, entrepreneurs must pay close attention to cash management. Here are some tips for saving money and managing cash flow:

Make financial projections. Forecast both expenses and anticipated revenues for at least the coming year. This will help you predict when you're likely to have cash and when you're likely to need it. You should also maintain a cash reserve if possible.

Create contingency plans. Have several budget projections, including best case and worst case scenarios, and think about how you might respond. In the event sales don't take off as expected or there's some unforeseen problem, you'll be better prepared.

Keep a lid on spending. One of the most common problems with new businesses is the owners' tendency to spend freely. There's no need to have lavish offices or expensive furniture. Remember, you're in this for the long haul: You should try to get as much value as possible out of every transaction, whether you're leasing office space or stocking the company kitchen.

Keep inventory low. Don't stock inventory based on your fantasy of what you think you'll be selling in six months. Instead, stock only what you know you can sell in the short term.

Lease, don't buy. Another good way to conserve cash is to lease equipment instead of buying it. Although leasing can be more expensive in the long run, it helps you avoid laying out a lot of capital all at once for things like office furniture, computers and copiers.

Delay hiring employees. Try to improve the productivity of current employees (without burning them out), use independent contractors and consider outsourcing certain nonessential functions. Employees are expensive, so you should put off adding permanent hires as long as you can -- or at least until you're earning the revenue to support them.

Go without a salary. Some experts recommend stockpiling a year's worth of living expenses before going into business. Admittedly, this may be difficult, but you should at least avoid paying yourself an excessive salary. Too many entrepreneurs waste cash by paying themselves big salaries without the revenues to justify them.

Speed up customer payments. Try to get customers to pay on time or early, if possible. Offer incentives like discounts or late fees, and adopt more effective collection techniques for deadbeat customers.

Don't be wasteful. Recycle and reuse what you can -- for example, boxes, computer discs and file folders. The savings may not be large on any given item, but they can add up over time.

A strong Business Plan may not guarantee success; but it could certainly prevent failure!

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Cash Flow
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Franchising Your Business
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