Failure to understand your cash position, as well as your current and future cash needs, will result in disaster. The sad truth is that cash-flow surprises kill many startups. According to Dunn & Bradstreet, 90 percent of small-business failures are caused by poor cash flow. To prevent becoming part of that 90percent, you’ll need to maintain a focus on cash. When it comes to the financial management of a growing company, always remember that cash is KING.
Good cash flow management means understanding every inflow and outflow of cash. In principle, you must delay every outlay of cash as long as possible, while incenting everyone who owes you money to pay it as rapidly as possible. Also, be vigilant about surprises such as unanticipated payment lags and unplanned cash outlays.
“When it comes to the financial management of a growing company, always remember that cash is KING.”
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So how do you proactively manage cash? Here are some basic disciplines that every entrepreneur must understand and practice to optimize their cash:
- Analyze Cash Every Week. Each week, check your cash balances and how your expected inflows and outflows of cash compare to your projection.
- Monitor Your Customer Balances. It is easy to fall short in the management of your Accounts Receivable (money owed to you from customers). Always use a software system to track who owes you money so that you can follow up with customers and send invoices or statements.
- Time Large Expenses. Get in the habit offsetting aside small amounts to fund large expected expenditures such as business license renewals and quarterly estimated tax payments. It is best to put the money in a separate account that you don’t have regular or easy access to, that way you are not tempted to raid it for splurge expenses.
- Bill Up Front. Ask customers for payment on delivery, and only accept Automated Clearing House or credit card payments to avoid uncertainty or delay in payments. You can also enforce or encourage pre-payment. While some customers may be deterred by upfront payment, discounts can win them over, and late payment charges can reduce overdue accounts and help you predict cash flow needs.
Remember, cash is king. Managing it requires proactively taking steps to watch your dollars. Use these tips and techniques to proactively manage tour cash to give your company the best shot at success.
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