March 2011 Cash Flow
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Cash Flow

 
By Steve Strauss. ARCHIVE:

Cash flow is your business oxygen. Without it, your business will suffocate and die. In this blog, and the next few, I want to share with you some ideas and ways to increase cash flow and profitibility.

The first thing to consider in the process is creating adequate and consistent cash flow. A cash flow crunch is usually the result of poor planning. All businesses have business cycles and they must be planned for. Starbucks knows that coffee sales go up in the winter and down in the summer. In the summer then, they introduce icy drinks to keep the cash flowing. The same should be true for you. You must know your business cycle, know when times should be good and bad, and plan accordingly.

So, another reason to create a budget (aside from the ones I mentioned in a previous blog) is to ensure that you will have adequate cash flow. I can't say this any more plainly: Without consistent, sufficient money to buy inventory, pay bills, handle taxes, handle payroll, and pay yourself, you will go out of business. Preserving and defending your cash flow therefore is critical.

Aside from creating a budget, here are three more ways to control your cash flow:

1. Live by the Rule: Without your business oxygen, your business will suffocate and die. Cash flow is king.

2. Create Cash Flow Projections: You need to know what will come in and when. Realistic cash flow projections are key. The question is: What do you expect your cash balance to be in six months? Always know that number.

3. Keep the Pipeline Open: A client or customer you create today may hire you, but it may be a few months before you finish the work and send out a bill, and it may be another month or two before they pay. You have to keep creating clients and doing work today to keep the cash flow spigot open.

Always project three to six months ahead when it comes to cash flow. If you will need money in six months, you must create new business within the next three months. That way you can do the work or sell the product, bill it, and get it paid within six months.

If you do run into a cash crunch, there are two things you can do:

First, receive your receivables. Allowing clients to pay Net 30 (30 days after purchase) is common business practice. But anything more than that is bad business. If you consistently have outstanding invoices, change your terms. Always remember that accounts receivables (AR) are the lifeblood of your business, representing your business' cash flow and liquidity. Getting your receivables current therefore can bring in immediate cash.

Your other option for dealing with a cash crunch, ironically, is to get a loan. Sometimes you simply need a short-term infusion of cash to keep things going until business picks up again. A prudent loan with a plan to pay it back can be a smart solution to a short term cash crunch .