If you don’t know what it is – your business may already be in trouble!
If you answer the following question incorrectly – you are one of the six out of ten small businesses that will fail. Are you ready? Here it is:
What is the number one killer of small businesses?
a. Lack of sales
b. Lack of profits
c. Lack of cash
d. Lack of employees
If you’re not sure, let’s use the process of elimination; you can do without three of the four for any period of time as long as you have plenty of the fourth. It should be clear now – “C”, final answer! Cash is king. The fuel that makes your business vehicle move forward, without it you have a hunk of rusting metal in your driveway. Without it, you will be a statistic – a business failure.
If you will recall in our previous blog (see below) we discussed building your ROAD (result oriented action & direction) map to success – planning your route to your business destination. In staying with our analogy, you have carefully planned your family trip to Fun World, including how many miles it will take to arrive, but you have forgotten one small but very important detail – you failed to calculate the amount of fuel you need to cover the distance. Can you imagine that, your family packed in the car, eagerly anticipating a fun filled day – then the car stalls and you’re stuck on the turnpike in sweltering heat? Suddenly, worrying about what time to leave or which route to take seem very trivial compared to having the required fuel to reach your destination don’t they? You wouldn’t make that mistake would you? Unfortunately, small business owners make it every day.
They fail to predict the cash needed to reach their intended business destination. Oftentimes, when I ask a small business owner how they know their company is doing well, the answer tends to be, “My sales are up!”. And while some do know if they actually made a profit on these increased sales, sadly very few know their actual cash position (the fuel gauge) at any given point in time.
Ok, so you got the answer right (go back and circle the right one if you didn’t – no one’s looking!), so that means you are now one of the four out of ten that actually make it right? Well not so fast. Knowing you have to manage your cash flow and actually knowing how to manage your cash flow are entirely two different things. Time for another pop quiz!
Do you, or anyone in your organization, know how to manage cash flow?
If you answered “Yes”, congratulations, you are excused from having to read on! If you answered “No”, you have just increased your chances of experiencing business failure. You might be thinking, “Wait a minute, I have never done cash flow management but I have been in business for over five years now!”. Is this possible? Absolutely, you have a great product/service, you are an excellent sales person, you have great relationships with your vendors, your overhead has not caught up with your sales, you started out with or have access to sufficient capital; the preceding likely translate to flush cash reserves. That’s the good news – the bad news is you will likely be a victim of your own success. You will not feel it is necessary to control your cash flow, and then your business will eventually fail. It might surprise you to know that many businesses experience tremendous success and growth right before going out of business, and the reason often cited is lack of cash to support the growth! So what is cash flow and cash flow management anyway?
In essence, cash flow is the amount of money that comes into a business versus the amount that goes out. Cash flow management addresses the gap between when you have to pay your suppliers and employees, and when you collect from your customers. Les Masonson, author of Cash, Cash, Cash: The Three Principles of Business Survival and Success, has described cash flow management most succinctly, “getting the money from customers sooner, paying bills at the last possible moment, concentrating money to a single bank account, managing accounts payable, accounts receivable and inventory more effectively, and squeezing every penny out of your daily business.”
You might already practice some of these techniques, for example stretching your supplier payments as long as you can. But before you pat yourself on the back – there is a difference between being late on your payments and managing your cash flow – and that difference is organization. Without having an organized approach to your cash flow – being late on your payments just makes you late – it also makes you a credit-risk and in danger of losing your suppliers.
To get organized, first you must know your current cash position. If you are not sure how to arrive at this, it’s the same as reconciling your personal check book: last balance minus any withdrawals (i.e. checks that have not cleared) plus deposits. Next, list all your recurring expenses such as rent, utilities, payroll, loan payments, etc., include the amount owed, and when – a spreadsheet works well to accomplish this. Once you have your list you have to prioritize it, for example payroll and payroll taxes get paid before utilities. Now you have to make two more lists, one lists the estimated collections (actual deposits not sales!) you expect for the week, and the other lists payments for the week. You should end up with the following calculation:
Starting Balance
+ Estimated Deposits__
= Estimated Available Cash
-Estimated Withdrawals
= Estimated Ending Cash Balance
This will provide you with an estimate of your cash position for the week and allow you to make decisions as to who gets paid what and when. It also tells you what your collections goal for the week should be in order to cover the estimated payouts. If a vendor calls looking for payment, you can actually make a commitment, schedule it, and live up to it!
Don’t forget at the end of the week to compare what actually happened to what you estimated. Reconcile your ending balance and now you are ready to start the next week all over again! Sounds like a lot of work? Actually its not if you organize, and remember, not doing it is the primary reason most companies go out of business. Short term cash flow management like the example given above is critical for businesses in trouble, but even if your business is doing well, you stand to benefit from doing this forecast on a monthly, quarterly, and yearly basis.
Ever driven a car with a broken gas gauge? Pretty scary isn’t it, never knowing when you will run out of gas? It’s not a problem as long as you can keep the tank full at all times, but how realistic is that? Is your business account always full of cash? If not – its time to fix the gas gauge – start cash flow management now!
Mark A. Sandate is the Managing Director of MASSolutions, LLC – a small business advisory firm, and an accredited Executive Associate of the Institute for Independent Business (IIB). For more information and to inquire about a free, IIB sponsored, 4 hour consultation please email mas@mas-solutions.biz.
