I have mentioned it before, and I’m sure I’ll mention it several times again: Cash flow is one of, if not the most important aspects of a healthy business. In fact, healthy cash flow is probably one of the most important aspects of a healthy home as well.

Making tons of money is great, and everyone strives for it. It isn’t nearly as important as cash flow though. Sure, I could bring in $1,000,000 a year in profit, but if I can’t get $1,000 cash out of my bank when my car breaks down, what’s the point?

Instead of listing off all the ways to mess up your cash flow (I’ve seen too many to list), let’s go over some simple ways to keep the lifeblood flowing through your company.

1. Don’t spend all of your seed money

It doesn’t matter how you get it. Maybe you got a bank loan, you took cash advances from your credit cards, or you sold your baseball card collection. However you got the money, try to hold onto it for as long as you can. If you set aside $10,000 to start the business, resist the urge to immediately spend all the money. Sure, maybe you’ll get a better deal from a vendor if you buy a year’s worth of product at once. That new truck might seem like a great way to promote your new business. Just remember; emergencies happen, and developing a strong customer base takes time. If you can, try to keep 25-50% of your initial investment in the bank (or somewhere it can collect some interest while remaining highly liquid if you suddenly need it).

2. Reduce or eliminate accounts receivable collection times

Ideally, start out your business on the right foot by collecting from your customers at the point of sale. If you are in retail, make sure they don’t leave with the product before you get paid. If your service stretches out over a long time, get a deposit, and then final payment when you’re job is done. If you have to offer terms, keep them short. Instead of offering Net 30, try Net 10. Try offering an incentive for early payments. Give the customer a 1-2% discount if they pay immediately, or full price if paid in 10 days.

3. Setup or extend accounts payable terms

For the first couple months, most vendors will require you to pay immediately for your orders. Once you’ve established a good rapport, ask for terms. On small orders, see if they’ll give you Net 30. On larger orders, try asking for Net 30/60/90 to split up the order into 3 manageable payments. In addition, try asking for an early payment discount to save you some money when you do pay in advance. The most important aspect is to make sure your customers pay you before your bills are due.

4. Avoid unnecessary fees

If you do #2 and #3 properly, this won’t be as big of a problem. However, if you start paying your bills late, you’re going to start accumulating late fees. Having poor cash flow will almost always lead to higher bank fees as well, since you’ll be paying interest on loans, credit cards, overdraft fees, and NSF fees that people with cash in the bank simply don’t have to pay.

5. Resist the urge to offer large discounts

I recently read an article about this on the Intuit Small Business Blog. Be realistic about how much you need to charge. Please don’t let me hear you say; “We lose money on every sale, but we plan to make it up in volume”. Before you sell your first widget, run the numbers to find out how much it will cost you to make each widget. Then, set your price so that ALL of your costs are covered at the end of each day, week, month, and year.

6. Pay yourself first, but be reasonable

Business owners usually fall under one of two extremes when it comes to paying themselves. They either play the martyr and never pay themselves, or they overcompensate and drain the company. The first couple years are going to be tough. You can’t expect to earn Fortune 500 CEO calibre salaries right away, but you also can’t do all this work for nothing. Find an amount that fits the budget you setup in #4, and stick to it. Pay yourself a set amount on a specific schedule, and don’t use the company as a personal bank account. Paying for personal expenses through the company makes bookkeeping a nightmare, and you always end up spending more than you think by doing it this way.

This is by no means a comprehensive list, but I think this covers the simplest ways to get your cash under control. Do you have any other suggestions? Please let me know in the comments.

Are you having cash flow problems of your own? I’d love to help. Please contact me and I’ll do my best to get your business back on track.

There are so many books, blogs, videos, and CD’s out there, trying to tell you the miracle cure for success. There is a plethora of #’d lists to solve all of your problems.

10 Steps to Business Success

19 Little Things You Can Do To Turn Your Business Around

The 432 Facts About Small Business Finance

…..and so on

To be fair, a lot of these have some good tips, most of them based on common sense. I read them all the time, and I’m sure I’ll write a few of my own someday. If you already have a strong foundation, these can be very helpful to get you to the next level. But in the beginning, before you’ve reached a level of success, you have to go back to basics. In the past 20 years, I’ve noticed 1 common trait to all successful businesses, big or small. It’s also the one common factor missing in most of the businesses that don’t make it. It doesn’t involve social media, R&D, or hiring the right people. It’s much simpler than any of these things, but can be so much more difficult to get right. So, what is it?

Positive Cash Flow

Cash flow (also “cashflow”) refers to the movement of cash into or out of a business, a project, or a financial product. It is usually measured during a specified, finite period of time. (Here’s how Wikipedia describes it)

It’s a simple concept. You want to have more money coming in than going out. I’m pretty sure a basic handling of this concept occurs the first time you get an allowance as a child. It’s one of those obvious facts of life that get neglected on a regular basis. Others include;

I should start saving for my retirement in my 20’s.

I should eat better, and exercise more.

I should stop using my credit card for take-out, and then only make the minimum payment each month.

Unfortunately, just because it’s obvious, doesn’t mean it’s automatic. In business, it’s really easy to get caught up in the wrong financial statements. When a bank, other lender, or vendor asks for financial statements at the end of a fiscal year (at least where I live), they usually focus on the same 2 statements; the Profit/Loss (aka Income Statement) and the Balance Sheet.

The Profit/Loss statement shows your income, your cost of goods sold, and your other expenses. A good result on this statement means you sold your products or services for more money than it cost you to buy them and support the business. The balance sheet shows your Assets, your Liabilities, and your Equity. Basically, how much you have or will have, whether tangible or not, and how much you owe or will owe. The difference is your equity, positive or negative.

These are very important to judge the success or failure of a business. However, focussing on these exclusively can be disastrous.

How can my Balance Sheet and Profit/Loss look great, but I’m still broke and my business is falling apart? 

Let’s think about what these 2 things are telling us.

Profit/Loss:  Let’s say you generate $1,000,000 in revenue this year. The products you sold cost you $500,000, and the rest of your expenses (wages, utilities, advertising, etc.) cost you $400,000. You had a 50% gross margin, and $100,000 in net profit. That’s great, and hard to find in the last couple years. Shouldn’t there be $100,000 in my bank account now? Well, no, not usually. What if 1/4 of your customers haven’t paid their account yet. You could have $250,000 in receivables (money people owe you). Maybe the increase in sales made it necessary to buy a bigger building. These 2 expenses don’t show up on a Profit/Loss, they’re over in the Balance Sheet.

Balance Sheet: Let’s say your balance sheet looks great too. You have $1,000,000 in assets, and you only owe $800,000. That’s great! My business is doing so much better than everyone else, right? Well, once again, not necessarily. Again, assets aren’t just cash. They’re made up of cash, receivables, and other items of worth (usually buildings, land, inventory, and vehicles). Receivables are only assets until you realize that the customers aren’t going to pay you. If the economy were to take a turn for the worse, and suddenly 1/2 of the customers who owed you money went bankrupt (sound familiar), then what?

As you see, it’s not hard to look great on paper, but still not have enough money to put gas in the company car. If all of your money is tied up in inventory sitting on a shelf, how do you pay for the furnace when it breaks down?

This is a topic that I could write about for days, and I think I’ll put together something more substantial, perhaps a guide or eBook. The main point is this; you need to have fast, positive cash flow in your business at all times. Just like in your personal finances, you need to have the cash available to you when disaster or opportunity strikes. Here are some examples:

Disasters

• your store needs some major repairs (i.e.. furnace, plumbing, new windows)
• you ordered an expensive item for a customer, they bail, and the vendor won’t take it back
• your tax return gets reassessed, and you suddenly owe $10,000 more than you thought

Opportunities

• one of your vendors is offering you 35% off your order, if you pay for 3 months worth of product in advance
• a booth just opened up at the trade show you want to attend, but it’s next week and you need to fly 2 of your employees down
• a smaller competitor is struggling, and has decided to sell the business, giving you the opportunity to buy it and open a 2nd location

 Ok, fine, I believe you, now what do I do?

Every industry is different, but here are a few tips that apply to a lot of businesses.

Extend credit very carefully:

Some of you eBay sellers and convenient store owners don’t run into this. However, there are still a lot of small businesses that give credit to their customers on some level. This is especially true when your customers tend to be other businesses. Be very careful who you offer terms to. Think of it as giving them cash out of your pocket, or giving them the keys to your car. Would you do that with a stranger?

If you are in an industry where this is a necessity, at least follow this advice.

• Keep the terms for repayment short. Instead of giving them 30, 60, or 90 days to pay you back, offer them 7 or 14 instead. Consider offering discounts for early or pre-payment.
• Have a credit card and drivers license on file.
• If it’s business, get some referrals from their other vendors, and have them fill out a vendor application.
• If it’s an individual, run a credit check, and have them sign a credit agreement.

In the moment, it’s a bit more paperwork, but it will save you a lot of trouble in the future.

Inventory Management:

Having $1,000,000 of inventory on the shelves looks great on a Balance Sheet, until the products get old, or the fad dies off, and now they’re only worth $500,000. Sure, it’s good to buy in bulk to get the discount, but there’s a fine line you need to walk. If you’ve been in business for a few years, sit down this weekend and look over your sales figures for the past few years. If there are items that sell well, year after year?

• Talk to your vendor, and negotiate a really big discount on buying 3, 6, or even 12 months worth of that stock.
• Try to get them to give you good repayment terms, so you’re payin
  g more during the busy season, and less when business is dead.
• Never buy fads in large volume, unless you can afford to lose big. For every Tickle-Me Elmo, there are a hundred Segways rotting away in warehouses.

Run your business the same way you run your house. If you have $1000 in the bank, would you go out and spend it all on toilet paper, even if you know you’ll use it eventually? Of course not. You’d be broke, and having thousands of rolls of toilet paper on hand wouldn’t do much to appease your impending hunger.

Buy vs.. Lease or Rent:

There are a lot of opinions on this debate. I also know that there are lots of tax implications that come into play, which is a topic that could take up a bookshelf, so let’s avoid that for now. Let’s discuss this as it pertains to cash flow.

Before you make a large asset purchase, like a building or a vehicle, consider your current cash position. If you have to go into significant debt, or spend all of your emergency cash, I would think twice. In the first few years, especially in a micro or small business, financial agility is very important. I understand the value of owning the building. The long term benefits of an asset that goes up in value as the amount you owe goes down is obvious. However, unless your trust fund is paying for this, you’ll want as much money in reserve as possible. Renting and leasing the equipment, vehicles, and building gives you a consistent monthly payment, and frees up your cash and credit for inventory, emergencies, and opportunities. Here are a few quick points:

• Renting an office can save you from repairs and maintenance on a building you own
• Sign shorter leases (if any) if you think you’ll outgrow the office quickly
• Upgrading rental equipment and tools is much easier than selling and buying

Summary:

Look, if your business has a war chest like Apple or Microsoft, you can approach this much differently. The point of this is to get you from where you are, to where they are. Companies like Apple are powerful because they have that kind of cash to spend if they need to. They can weather a big lawsuit, buy a rival company, or test out crazy product ideas, without worrying too much. However, we’ve seen plenty of times when a big company has fallen because they were too focused on profit margins, but didn’t have any money in the bank when they needed it.

You want every dollar you have to be working as hard for you as possible. Instead of buying extra inventory to store in the back, why not invest some of it, or pay off the company credit card? As a small business owner, you have to spend every dollar as if it were your own, because most of the time, it is.