Eight Steps For Cash Flow Planning

(Monday, January 30, 2006) - In today's small business market, nearly 63% of small businesses fail within the first six years. For home-based businesses that number dwindles to a mere six months before the owner is back to sending resumes and interviewing for a permanent position. And what is the primary cause of their failures? It's cash flow. To a small business owner, cash is the lifeblood of business success and is often overlooked until it's too late to rein in the spending and adequately recover.

The key to proper cash flow management is recognizing that you need it. Making money in your business as shown on the income statement (revenue versus expense) is important, but it doesn't always translate to cash in the bank. The best way to deal with cash is to review your business' finances and focus on taking steps to regain control of the business. So here are some cash flow basics:

1) The first step. Remember that cash is separate from profit and that businesses run first and foremost on cash. You can be very profitable and still have no money and go out of business. Knowing when you will receive your cash is as important as knowing if and when you'll be making a profit.

2) How do you get cash? List all cash inflows to the business. By increasing sales, collecting on accounts receivable, consolidating bank accounts, and better managing your inventory you can regain control over your finances and see dramatic changes in the cash flow.

3) Review how you use cash. List all cash outflows including payroll, allowing people to borrow it from you (accounts receivable), and spending cash on capital purchases, are all ways that your cash leaves the business. As a business owner, you need to have in writing when you expect those actions to occur and plan ahead for the expenditures.

4) Timing is everything. Identify when cash flows in or out so you can more accurately plan for the inevitable ebbs and flows in your business cycle. Then subtract cash inflows minus cash outflows for a clearer picture.

5) Truth and consequences. Identify the major consequences of cash as it currently flows through your business. Are you facing weeks or months of running a deficit? Are there times when you have a large cash inflow?

6) Show constraints. These are the cash inflows and outflows that cannot be altered. This translates to finances that are fixed and won't provide an opportunity for change in your budgeting.

7) Show opportunities. Identify inflows and outflows that can be changed or rescheduled. These items will depict opportunities for generating cash flow either by selling off inventory or reducing the length of your sales cycle.

8) Plan for success. By establishing a written plan for a positive cash flow, you'll be better able to see where the money is going and if you're on track for future success.

What do you do when you run into cash flow crunch?

Business owners are advised to try to collect monies owed to the business and see what they can recover in the way of long-term losses. Then try to convert inventory to sales (hopefully cash sales). The business may have to discount product or services in order to generate cash. If the business is service-oriented, try offering those services under different or shorter terms so that cash can be generated more quickly. Finally, consider converting other assets to cash. Start with the least useful items in the business and work upward.

After you've considered all the assets you control, then you can begin to think about creating a liability such as considering an equity partner for cash or applying for a loan. The challenge of lines of credit is that they come with a higher price tag, that being higher interest. The cost of borrowing could include appraisals, title searches/policies, yet typically loans have a lower cost of borrowing than lines of credit.

Understanding when it is time to shift from business production and assume the business management role is never an easy lesson. The finances must have an important place in your weekly time allocation and attention in order to keep the business successful and on track. Cash flow can't be reviewed any less often than any other of your financial reports. You need to be aware of where you stand in a cash position at least weekly, and at a minimum, monthly.

To learn more about proper cash flow management, talk with a Fiducial representative by calling 866-FIDUCIAL or visiting the web site at www.fiducial.com.

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