Cash is King

Is it in your organization? It should be. You should be forecasting your cash for the next thirty days, reviewing it daily, updating it weekly.

Some small business owners are unclear on the difference between “cash” and “profit.” They are totally different. You can be very profitable and still run out of cash. Likewise, you can be in a good cash position even if your financial statements are showing a loss. If you’re not clear on this, have your accountant explain it to you. But for purposes of this discussion, “cash” is the money you have immediately available . . . usually whatever you have in your checking account plus whatever you have in a bank line of credit. When you spend more money than you deposit, your cash goes down . . . you have negative cash flow and that’s bad. When you put more money into the bank than you are drawing out, you have positive cash flow and that’s good.

When you think of a cash flow forecast, think of your check book. Your check book is an historical record of what you deposited, what you spent, and what your balance was at any point in time. A cash flow forecast is the same thing except it’s predicting future deposits and withdrawals rather than recording past transactions.

So to start, you record your “opening balance” which is the cash you can access immediately as described above. Then you schedule the bills you expect to pay (including payroll, taxes, etc.) over the next thirty days and predict the receivables you will collect over the same period. Of course, your “opening balance” will go up and down during the course of the month as bills are paid and deposits are made. If you finish the month with a “closing balance” that is below your opening balance, then your cash flow for the month was negative. If your closing balance is higher, your cash flow for the month was positive.

The real value of this cash forecasting is that it allows you to closely manage your cash on a daily basis. If receivable collections don’t occur as predicted, you may elect to postpone paying some bills until the expected receivables arrive. Or if receivables arrive more quickly than expected, you may elect to accelerate some vendor payments. But most importantly, cash forecasting is an early warning system that alerts you if you are going to run out of cash and gives you time to arrange some bridge financing with your bank

Good cash management is essential to the financial health of a business. Worrying about running out of cash is one of the things that keeps small business owners awake at night. But there’s a cure for insomnia. Each day, look at how much cash you had to start the day, how much was deposited, how much was paid out, and how much cash you had at the end of the day. It can be a simple report that doesn’t take any time to generate or to read. Do it. You’ll sleep better.

For more small business blogs, visit my website at www.rocksolidbizdevelopment.com.

Anticipate Your Cash Requirements

“Most companies grow themselves out of business. They either can’t finance (the growth), or they can’t manage it.”


Sadly, when a business fails, it is often not because it was founded on a bad idea. It’s because it simply runs out of money. Even if the business is profitable, it can still be cash-starved out of business. How does that happen?

Several ways.

If the business is a brand new startup, the entrepreneur at the controls will often underestimate his or her expenses. It might be that s/he misunderstood the labor market and ended up having to pay more than expected for key positions. Or, the cost of raw materials or inventory might have spiked unexpectedly. Or maybe sales just didn’t ramp up as quickly as expected. The bottom line is, too many startups try to get their doors open on a shoestring. If their sales forecasts and expense projections are right on target, they may get away with it. But more often, something is overlooked or something unanticipated occurs, and before the fledgling business knows it, it’s awash in red ink.

The second problem small business owners tend to bring on themselves is trying to grow the business too quickly. In almost every case, growth is expensive. A business may need to add people or inventory or equipment or office space to handle the additional volume. An owner may try to handle growth expenses out of earnings (rather than borrowing from a bank or a private investor), but like his startup counterpart, this owner may fall victim to an overly optimistic sales forecast. When sales don’t explode as planned, we suddenly have some significant extra expenses (people, inventory, equipment or office space) without sufficient new sales to cover those expenses.

The problem in both cases is the natural optimism of the entrepreneur . . . the expectation that everything will work out somehow. The “can do” spirit and “full speed ahead” determination is what makes entrepreneurs unique and successful. But it can also get them in trouble if they don’t correctly anticipate their cash requirements.

The answer, of course, is to keep a cash reserve beyond what you believe you’ll need so that when you hit an unexpected bump in the road, it doesn’t put you out of the game. And the bigger the reserve, the better. The bigger the reserve, the bigger the bump you can hit.

For more small business blogs, visit my website at www.rocksolidbizdevelopment.com.