One of the most important lessons many entrepreneurs have to learn is that cash really IS king. Simply put, it doesn't matter how much money you generate in the future if you don't have enough cash to pay your bills today. To run a successful business, your employees need their paychecks, landlords need their rent and suppliers need to be paid.
More businesses fail due to a lack of cash than a lack of profit. What’s the difference?
Profit is the difference between income and expenses. Income is recognized at the time the sale is recorded (invoiced). Expenses are recorded at the time the bill is received. When your business generates more income than expenses, you are making a profit.
Cash flow is the difference between inflows (actual cash received) and outflows (actual cash paid). When you have more cash coming in than going out, you have positive cash flow. This is a good thing. On the flip side, unanticipated cash shortfalls can cause you to lose suppliers, lay off employees and ultimately close your doors.
Tracking and measuring the flow of cash is an indispensable business management tool that can help you spot problems – and correct them – before they become big issues. Cash flow projections are among the core financials you will need to run your business – and doing this is easier than you think:
Start with the amount of cash in your current bank account(s).
Make a list of anticipated inflows, such as customer payments, interest or investment earnings, rental income, etc. List the amount and when it will be coming in.
Make a similar list of anticipated outflows including payroll, monthly overhead, payments on accounts payable or other debt, taxes payable, etc. Again, list the amount and when it will be coming in.
Put it all into a spreadsheet in chronological order. If at any point you have a negative cash balance – you have a potential problem.
Most folks are optimistic when projecting cash flow. I challenge you to repeat the above exercise and be extremely conservative. Estimate slower inflows and sooner outflows. Do you get a different result? Is your cash flow negative? Welcome to the real world!
If you’re a small business owner with ongoing cash flow issues, I can help. Let’s talk.