We’ve all heard that expression, “Cash is King!” And if you own your own business you know that is never more true than when cash is tight!  Not knowing whether you can pay your bills or make payroll makes for sleepless nights and anxious days.  Unfortunately, when you desperately need cash is when the bank absolutely will not lend you money.  You’re in a Catch-22, you need money to pay your bills, but you can’t get money until you pay your bills!  So aside from wringing your hands what can you do?

Fortunately, managing your cash flow is not as difficult as you might think.  It does not involve a crystal ball, strong-arming your customers, or pleading with your vendors to extend their terms.  It does involve some discipline, research, and a little bit of time.  If having a cash-flow projection keeps your business afloat in this difficult economy and let’s you get some much needed rest, then I’d say that’s a small price to pay.  You can take the first step to managing your cash flow by understanding it’s composition.

What Affects Cash Flow?

Cash flow is not just about whether you have money in your checkbook.  If only it were that simple!  Your checkbook balance is not a static figure, it changes every day.

The first issue making cash-flow difficult is timing – when is money coming in or when is money going out.  The cash-flow nightmares start when we don’t understand the timing.  Just because a customer is supposed to pay you within 30 days doesn’t mean they will.  If you are counting on their payment to make payroll and it doesn’t happen – Yikes!

The second issue making cash-flow difficult is knowing how your business operations affect cash-flow.  Many businesses experience a major cash-flow crunch when they are growing.  Sales are way up so how can cash be way down?  If your business provides consulting services you have to pay your employees for doing the work.  You pay them as they work for you.  You don’t bill you client for several weeks, when the work is completed.  If you’re lucky, your client pays you within 30 days.  So when they finally pay you it could be 2-3 months after you paid your employees.   Growth is ultimately good for your business, but temporarily it creates a cash-flow nightmare!

Do You Know Your Real Cash Balance?

If your checkbook is not up-to-date, you have no idea where you stand.  Every day you should update your checkbook balance for every single check written and every deposit made.

“That’s too much work.  I’ll just call my bank.” Nice try, calling the bank and asking for your balance doesn’t work.  They’ll tell you what they have in your account.  But that’s not the real balance.  The bank doesn’t know what checks you have written and not mailed, or what checks you have written and your vendor hasn’t cashed.  They don’t know about the deposit that’s been sitting on your desk for the past 3 days!

And when was the last time your checkbook was reconciled?  The minute you get your bank statement you should reconcile your checkbook!  Reconciling is the only way to know if there are errors – yours or the banks!

What Does Your Cash Flow Look Like Next Month?

If you can’t answer that question you may have a problem.  And don’t tell me you need a crystal ball!  Every singly business should be preparing cash-flow projections on a monthly basis.  Cash-flow problems hit every business.  It’s not a matter of if you will have a problem, it is a matter of when!

Having a cash flow projection will give you a warning ahead of time, as to when you won’t be able to pay your bills or your employees.  But with enough advance notice, you will have time to figure out a good solution.

If you are ready to prepare a cash flow projection, download this report, Managing Cash-Flow When Money Is Tight, from The Sustainable CFO. If you’d rather have someone else prepare a cash-flow projection for you, contact us at [email protected] or 410.231.1881