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Understanding Your Business: Cash Flow Matters

Posted at August 26, 2015 | By : | Categories : Analyze,Our Work,Plan | 0 Comment
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Our Work

Developing an accurate Profit & Loss statement is a good start, but small business owners must continually monitor their cash position. An all-to-common landmine for entrepreneurs is a shortage of cash to pay the bills. If this goes on for an extended period of time, the result may well be bankruptcy or dissolution.

Positive cash flow should never be taken for granted. Slow payments to your creditors can impact your credit rating and your future ability to borrow. Cash flow is particularly critical if significant sums are owed to creditors, or you have an employee payroll. Employees do not want to work if they are not confident that they will be paid!


Will the income you planned in your P&L cover the expenditures that arise? We should always assume that the unexpected will happen!  For example:

o    If new work requires a contract to be signed, the legal work always takes longer than we expect – especially if the client has a large legal department or outsources its contracts to a large firm. As a result, the income stream may be delayed – perhaps by months!

o    We may have clients from which we have come to expect slower payments. However, promises by a client to do better, and our own optimism, can lead us to believe that this will change. And, then it often does not!

o    Slower-than-expected sales can come as a surprise. The economy slows. Our industry slows. Our sales promotion does not live up to expectations. Our primary rainmaker – which may be us – has a personal crisis and cannot work.


If you have to spend more in a month than you take in, how will you supply the difference?

o    Emergency cash funds should always be included in the budget for unexpected costs, such as a new transmission for your work vehicle or immediate repairs from flood damage to your office.

o    A dedicated business savings account can provide a bridge to liquidity – at least for a while. Be sure to establish one with some of the capital that has been invested in the business. If you need to withdraw from this account, make it a priority to rebuild the balance within a reasonable amount of time.

o    If a line of credit is established with your bank, its use will not only smooth the low spots, but build your credit rating if paid back on time. In addition, you should be eligible for a better interest rate from an institution that knows you. Some banks allow credit lines to be triggered automatically when the checking account is depleted – which can save time and penalties. Be sure that you understand how this works – especially if the ownership of your bank has changed. The rules may have also changed!

o    Contact vendors immediately if you realize that you will not be able to pay them on time. Vendors typically prefer to work out, in advance, a delayed-payment plan. This is far better than a cash crunch for you turning into a potential problem, or even crisis, for them.

o    Use company credit cards, but carefully consider the interest rates and penalties! Unless you are confident that you will be able to pay the entire credit card bill, use caution!

o    As a last resort, take money from your personal savings to provide temporary cash flow in the form of a personal loan. In this case, be sure to get direction from an accountant on the best way to handle this for tax reporting. If you have to do this more than once or twice, re-think your business plan. Making a practice of funding a business out of personal savings is not a good long-term strategy!


Have you considered your cash status recently? There is no worse feeling than to realize that you have paid a bill that could have waited, and now owe a bill you cannot pay. Do not let that happen to you!


Until we meet again,

The Entrepreneur’s Friend

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