Preventing a Cash Flow Crisis

Managing and protecting the cash flow of your small business is pivotal to long-term success- we all know this. The inability to manage the ebb and flow of cash can cripple inventory, negatively affect growth and create a back up in bills that can be hard to overcome.

Keep in mind that cash flow refers to the positive balance available after collecting from clients and post payments- once rent, payroll, taxes, vendor invoices, etc. have been rendered.

Even a ‘good on paper’ business can suffer from negative cash flow. So how do you prepare to stay ahead of curve in the cash game?

Start by mapping out the financial year. Call upon past years to build a realistic topography of financial peaks and valleys. When do you experience a fluctuation in cash flow? What points of the year tend to mark as cash poor? Just knowing your timeline in advance can help you prepare for the tight times.

Use this map to create financial projections on a weekly, monthly and yearly basis. These projections should be inherently part of your business plan, though they require constant maintenance and demand total flexibility.

Define your cash cycle- how much is generated per cycle and what is the timeline? How much of your resources are tied up per cycle and what are they tied up on? Incorporate this knowledge into your projections.

Note your most difficult customers and frequently late payers and bill early and often whenever possible. Offer incentives for early or full payments.

Beware of cash flow black holes! Plan for any expansion, heavy business-to-business sales or inventory purchases well in advance and if planning on acquiring new equipment, consider your purchase vs. lease options.

Determine fixed vs. variable costs and see how you may be able to revise anything in the variable column.

Some business experts highlight the three vitals of cash flow management:

  1. Collection days- the length of time you allow to get paid
  2. Inventory turnover- how long your inventory sits on capital, waiting to be converted into sales
  3. Payment days- the length of time you wait to pay your bills