Surviving is all about managing cash flow - Military Careers, Second Careers - Army Times

Surviving is all about managing cash flow

Every entrepreneur I know wants to make more money.

But surviving in business is not only about how much money you make, but when you make it and when you spend it. In other words, “cash flow.”

If you can’t control your cash flow, you can’t control your company.

One of my very first clients was a successful floral shop. They were one of the leading florists in town, hired to decorate many of the major society weddings and parties. The problem was most of their money came two times a year: Christmas holidays and June weddings. Twice a year, the two partners felt rich, and they spent a lot. But every year — between February and May, and again from about August to October — they had to scramble to pay their bills. Sure, on paper they showed an annual profit. But the stress of not having enough cash in the bank eventually drove the company to close.

Bad cash flow management did them in. These partners dealt with money on a day-to-day basis rather than looking at their annual and long-term cash needs.

To keep cash flow problems from turning into a tidal wave that drowns your business, you have to plan:

1. Recognize the lag between outgo and income. No matter what your business is, you have to pay money out before customers pay you. As a consultant, this might be rather minor: expenses such as marketing materials and networking organizations, rent, your Web site, some travel. And clients will usually pay within 30 to 60 days after you finish a project.

As a manufacturer, things are much worse. In my company, as a publisher, we typically have to pay book development costs 6 to 12 months before a book is published and don’t see income for at least a few months after the first book is shipped to the bookstore.

2. Draw up a cash flow projection. Even if you don’t create an annual budget, sketch out when you expect money to come in and when you need money to go out. When you know you’re going to have a major expense in July, you won’t be so likely to spend all your money in April.

3. Watch your inventory. Inventory is just money sitting around in a different form. Whether it’s marketing brochures or, as in my case, a warehouse full of books, inventory costs you. The drain of having your cash tied up often counteracts the benefit of the lower cost of buying in bulk. So aim for just-in-time inventory management to keep your cash liquid.

4. Manage growth. You may want your business to get bigger, but growth costs money. This isn’t just a matter of increased marketing expenses; it can also be additional expenses to produce new goods, hire employees, expand facilities, add equipment and procure supplies. Typically, the bulk of these costs come before you’ve received sufficient income to pay for them. Growth eats cash, so be careful how fast you allow yourself to grow.

5. Get a line of credit from a bank or lending institution. A credit line is different from a term loan. A term loan is for a specific amount of money, a specific amount of time, often for a specific purpose. A credit line is more like a credit card. You can take money out when you need it and pay either all or some back every month. (Some credit lines require you to “zero out” for at least 30 days once a year.) Credit lines are designed for healthy companies that need to manage cash flow; you’re not likely to qualify if your company is in trouble. But credit lines make it possible for you to pay for your expenses months before you receive income.

6. Finally, save. Every business has income fluctuations. By starting to look for annual income and spending patterns, you have a better idea of when you’ll need cash. So build up your financial reserves in your high-income months to prepare for the lean months. The best way to have cash when you need it is to put some away when you’ve got it.

(Rhonda Abrams writes the Small Business Strategies column. She is president of The Planning Shop, publisher of books for entrepreneurs. Its latest is “Finding an Angel Investor In A Day.” Register for her free business tips newsletter.)