"My university degree in Computer Science didn't include any business training, so I've learned everything by trial and error," says Ryan Carson, founder and Director of Web applications provider Carsonified. "One of the biggest lessons I've learned is this: Your company cash flow may 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 simple, but you'd be surprised at how many people ignore this. So why is it the number-one killer of small businesses? Carson offers two main reasons:
- companies aren't realistic when it comes to predicting their income and expenses (they overestimate their income and underestimate their expenses), and
- companies don't see a cash shortage coming, and they run out of money.
What to do about it
In order to keep track of your cash flow, you'll need a simple spreadsheet tool, the most common of which is Microsoft Excel. If you don't have a copy, Carson recommends the free AJAX spreadsheet tool Num Sum.
The idea is simple: enter how much money is coming in vs. how much money is going out. "The most important thing is that the values go at least three months into the future, but I'd actually recommend 12 months," he adds.
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 cash flow healthy
Hopefully, you're convinced of the importance of watching your cash flow, but how do you keep it healthy? Carson offers the following suggestions:
- Spend as little as possible. This is especially important in the early days of your business, but it should apply in the long run as well. Before you make any purchases over $50, ask yourself "Do I really need this?" If not, you can live without it.
- Cut expenses as much as possible. Take 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.
- Acknowledge that 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 it is dependent on a specific invoice being paid on time, make sure to communicate with the company at least four weeks before it's due to ensure that it will be paid on time.
- Don't buy hardware (or anything else) you don't truly need. "This goes along with the above rule, but it's worth specifically mentioning," Carson adds. "I used my beat-up, old PC and banged up monitor until I was forced to replace it because it died. You don't really need that 23-inch 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 in good shape if the best-case scenario occurs.
- 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 realize 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," says Carson.
As far as your business is concerned, there is no way to understate the importance of cash flow. "Remember, you can have the most amazing service or product in the world," notes Ryan, "but if you run out of cash, it won't matter."
Sources: "Back-to-Basics Cash Flow," Trendline
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