Small Biz 101: Cash Flow 13 Dec 2005
61 comments Latest by taktuk_1990
Why cash flow is so important
Welcome to the second part of my Small Biz 101 series. For those of you who didn’t catch the first article, How to Get Started, this series is a simple guide for helping people start their own web-based company, based on my experience with Carson Systems.
In this article I’m going to be focusing on cash flow, because it’s the #1 issue that puts people out of business. On that happy note, let’s get started!
Cash flow basics
My university degree in Computer Science didn’t include any business training, so I’ve learned everything by trial and error. One of the biggest lessons I’ve learned is this: Your company cash flow will be the first thing to put you out of business.
Cash flow basically means "Do I have enough cash in my bank account to cover my expenses?" Sounds stupidly simple, but you’d be surprised at how many people ignore this.
So why is this the #1 killer of small businesses? Here are the two main reasons:
- Companies aren’t realistic when it comes to predicting their income and expenses. They overestimate their income and underestimate their expenses.
- Companies don’t see a cash shortage coming and they run out of money
You can have the most amazing service or product in the world, but if you run out of cash, it won’t matter.
What to do about it
In order to keep track of your cash flow, you’ll need a simple spreadsheet tool. My favorite is Excel. If you don’t have a copy (or don’t want to give your hard-earned cash to Microsoft), you can use the free AJAX spreadsheet tool Num Sum.
The idea is simple: enter how much money is coming in versus how much money is going out. I’ve created a very simple example for you here (Excel, 40KB). The most important thing is that the values go at least three months into the future (I’d actually recommend 12 months).
The beauty of having a realistic cash flow spreadsheet, is that if you see your bank account going into the red in three months time, you’ll have plenty of time to do something about it.
Tips for keeping your cash flow happy
Hopefully you’re convinced of the importance of watching your cash flow, but how do you keep it healthy? Here are my suggestions:
- Spend as little as possible. This is especially important in the early days of your business. Before you make any purchases over $50, ask yourself "Do I really need this?" If not, you can live without it.
- Don’t buy hardware you don’t need. This goes along with the above rule, but it’s worth specifically mentioning. I used my crappy old PC and banged up CRT monitor until I was forced to replace it because it died. You don’t need that 23" Apple Cinema Display - trust me.
- Be brutally realistic. Always overestimate your expenses and underestimate your income. Your cash flow should always be a ‘worst-case scenario’. If you know you can stay in business when things aren’t going well, then you know you’ll be dandy if the best-case scenario happens.
- Chase invoices the minute they’re late. It may sound harsh, but the minute that an invoice is late, call the company and start pressuring them. If they think they can get away with late payment, then they’ll put you behind all the other customers they have to pay.
- Update your cash flow regularly. As time goes on, you’ll realise that some of your predictions about income and expenses were wrong. When this happens, update those figures to make your cash flow realistic. I’d recommend updating your cash flow weekly. Once you’ve got a year under your belt, monthly updates will probably be enough.
- Cut expenses as much as possible. Have a hard look at the expenses column on your cash flow. Is there anything you can find a cheaper deal on? Anything in there that isn’t absolutely vital? Saving just a few dollars per month will really add up.
- People don’t always pay on time. When planning your cash flow, always account for the fact that it usually takes people longer to pay you than you think. Make sure that your cash flow doesn’t depend on certain invoices being paid on time. If your cash flow is dependant on a specific invoice being paid on time, make sure to communicate with the company at least four weeks before it’s due to make sure it will be paid on time.
Summing it up
I hope that this has been helpful. If you have any other useful tips for keeping your cash flow happy, or if you disagree with any of my opinions, please comment below.
Next time I’ll tackle the subject of how to generate new business. Stay tuned …