Here is a great article from Ray Silverstein, Inc. contributor and world-class entrepreneur.The article was originally published in December 2009 in the Phoenix Business Journal. It is even more relevant today.
If there are terms in the article you DON’T UNDERSTAND, you need to watch our training videos on cash flow included in our accounting basics library. They’re very easy to understand. It could save your business. Read on….
Friday, December 4, 2009 How well do you know your cash flow? Phoenix Business Journal – by Ray Silverstein
If you’re like most small-business owners, you manage by your profit and loss statement. That’s fine during normal economic conditions, but not while we continue to struggle with a recession.
A positive P&L may lull you into thinking all is well. But if you don’t also have a positive cash flow, you’re probably headed for trouble. Small-business owners tend not to think much about cash flow until they’re already in too deep. Right now, your mantra should be: “Cash is king.”
That’s why, in good times and bad (and especially bad), it’s smart to perform routine cash flow projections. It’s a valid way to monitor your company’s health, and it can help you avoid getting caught shorthanded if things suddenly tighten up.
Assessing your cash flow doesn’t have to be complicated. It can be as simple as answering these questions:
• How much cash do I have right now?
• What are my receivables (including aging), and when do I expect to get paid?
• What are my payables (including aging), and when are they due?
• What’s my backlog of orders that haven’t yet been filled? When do I expect to fulfill those orders and get paid?
• What is my estimated weekly payroll and commissions?
• What is my inventory level?
• What is the schedule of open purchase orders, and when do they have to be paid?
Cash flow is really nothing more than the sum of cash on hand, plus incoming cash, minus outgoing cash.
Once you answer the above questions and do the math, you can project your cash flow. Clearly, the goal right now is to keep it flowing.
What if you’re already in trouble? Obviously, many businesses are experiencing constricted cash flow these days.
For example, what happens when a company suddenly loses its largest customer? Not only does incoming cash dwindle, but the firm may be left holding too much inventory.
If your business is already in cash flow trouble — i.e., not bringing in enough money to cover what needs to go out — you need to take action at once.
Start tracking cash flow on a monthly basis, so you know exactly how much cash you need and when.
Once you’ve identified what you have versus what you need, focus your energies on two areas:
*Bringing in enough cash to cover expenses,
*Reducing expenses so there’s less to cover.
There are many steps you can take to get your cash flow in balance, including these:
• Cut your fixed expenses. One upside of the recession is that it’s a great time to renegotiate everything from your rent to your advertising expenses. You’re not the only one who’s hungry for business.
• Postpone discretionary purchases. Spend only on things you really need. Pass up great deals on things you don’t need.
• Reduce receivables. Step up your collections.
• Establish or increase credit with your bank. Don’t hide from you banker; he or she is a valuable resource. If you don’t have a great relationship with your banker, start building one.
• Reduce inventory. Discount it, barter it or cut creative deals with customers. Just get some of it out so you can bring cash in.
If you’re in trouble, manage in the “today,” or there may be no tomorrow.
But remember: If you’re disciplined and smart in the way you manage your business, you can improve your cash flow fairly quickly.
Ray Silverstein is president of PRO: President’s Resource Organization (www.propres.com), a network of entrepreneurial peer advisory groups. He also is the author of “The Best Secrets of Great Small Businesses” and “The Small Business Survival Guide: How to Survive (and Thrive) in Tough Times” (www.thesmallbizsurvivalguide.com). Reach him at 800-818-0150 or email@example.com. Read more: How well do you know your cash flow? – Phoenix Business Journal
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