Cash Flow, Part 1

There are various systems that can be used to keep a grip on cash flow. Small companies may do it differently from large companies. Even for a very small company, seat-of-the-pants, or on-the-fly methods may not be adequate.

Small Business

Where does cash flow begin? If you are in a business in which customers or clients pay you on the spot, a good starting point is when they pay you the money.
If you are in a business in which you bill them and they pay later, you could say cash flow begins when you bill the customer or client. So the first point is, don’t forget to bill them! That also means keeping good records of work done so that accurate bills can be sent out.

If they don’t pay in 30 days, send out monthly statements. If customers don’t get monthly statements, a lot of times they forget about the money they owe or think you have forgotten about it. You might be surprised what a good job regular billing and monthly statements do in keeping the cash flow going.

When payments come in, keep accurate records of them. Standard accounting practice is to deposit all income received. There are many good reasons for this, such as:
• It begins the process of keeping control of your cash by making sure none of it slips away without you knowing you ever had it, or without you being able to remember the details of it.
• It enables you to keep track of what your customers still owe, so that you can continue to bill those who are late.
• It gives you accurate figures to use for budgeting.

Budgeting

Budgeting is the key to mastering cash flow.
For budgeting, in addition to the records of income just mentioned, you will also need good records of your expenditures.

The basic idea is simple. You need to predict the amounts of income and expenditure you will probably have in the coming months (or longer) and arrange things so that your income is more than your expenditures.
Easy to say; it’s a bit of work to accomplish that.

If you are just starting a business, there is a lot of guesswork involved, but if you have been in business for a while and have kept good records, you have figures you can use for these calculations.

The figure you will use for your future projected cash inflow will be based on your weekly or monthly average in the recent past. Usually the past year is a good time-period to use to get the average.

You can adjust the average figure up or down if you have fairly certain knowledge that there are factors that will be different in the coming months. But remember that it is better to be conservative in making these estimates.

Next, calculate your average monthly (or weekly) expenditures over the past year (or whatever time-period you are using). Don’t do it in a lump sum, but rather break it down into all the categories of expense that you have, such as rent, utilities, supplies, etc.
Don’t forget to include in your calculations the money that will be paid to and/or required by owner(s).
Once you have these average expenses, take a look at each one and determine if any adjustments need to be made for anything that will be different in the near future.

Add up all the projected monthly or weekly expenses and see how they compare to the projected income. If they are less than the income, you are golden.

If they are more than the income, start chopping the expenses.

Simply deciding that you need to make more money, without making any cuts in expenses, is not a safe way of doing it. Yes, you can decide to make more money and plan how to do it. But to make sure your solvency stays intact, you should also take out the meat ax and cut the budget until it falls below the level of your projected income.

However!
There are always ifs and buts and cautions.

If you have a budget shortfall that is caused by a decline in your income, cutting the budget is vital, but an even higher priority is to reverse the decline in income. So, actually that should be something you address before you slash expenses. Or, if you have employees who crunch budget numbers, have them figure out the budget while you work on fixing the income. In this situation, don’t cut any kind of advertising or promotion unless it is obviously all wrong and not working at all. If anything, more promotion needs to be done. (But it needs to be done right.) And, certainly, check out the starting point of your cash flow: collecting the money, sending out bills, etc., as discussed above.

Tune in to our next episode, coming soon.

How to succeed

There are a lot of opinions about the economy, how it got the way it is, and which direction it is going. If you read the opinion pages of the Wall Street Journal and then editorials in the New York Times, you are likely to encounter diametrically opposing viewpoints. And these are both highly respected publications located a relative stone's throw away from each other. Then if you consider the fact that supposedly professional people--experts, economists, etc.--cluelessly led us down the path that led to what almost became the largest financial debacle of all time, you start to wonder if anyone really knows what is going on here.

On the other hand, some of the things they did to avert Great Depression II may have actually saved us. Well, we hope so, anyway.

It could be that the world economy has grown to a point that it has outstripped our ability to understand and manage it. My guess is, however, that there are people who understand it, but they were standing on the outside while people who did not understand it tried to manage it--unsuccessfully.

Be that as it may, the question for a business person is, where do I go from here? The question for an individual or a business is not a macroeconomic one. It is a microeconomic one. What can I do to survive and prosper in these times?

First of all, one has to assume that there will continue to be some economic life. Even during the Depression, life went on. There are many businesses in existence today that survived the Depression. Although it was bad, it was not a doomsday event. And what is happening today is, at least so far, nowhere near as bad as that.

There are still some people who are predicting silly things like hyperinflationary deflation, or some such oxymoron. We needn't pay attention to them. There is always somebody predicting the end of the world.

On the other hand, although we appear to be in a recovery now, it is not time to exhale just yet. We do not know if the recovery will be steady or rough, or if there will be a relapse.

Unfortunately, the best time to plan for times like these is before they happen.

One of the best defenses is to have reserves, and they should be built up during the good times so that you can fall back on them if necessary during bad times.

Another good defense is to have a good profit margin that can stand being squeezed a little in lean times.

Flexibility is a good thing, for example not having too many fixed costs that you can't get rid of. Any time you have a choice between adding fixed costs and doing something that can easily be scaled back, the more flexible route should always be given careful consideration.

Over-expansion is probably the basic cause of any subsequent downturn, and the same can be true at the individual business level. If you add a lot of assets and debts to try to keep up with business when times are good, those extra assets and debts can become like albatrosses around your neck if business slows down. There is a pace at which you can expand safely--a pace at which you can finance your expansion with your own profits rather than with debts.

Of course there is a time for debt, such as for a carefully evaluated project whose expected profits are greater than the cost of the debt.

One of the lessons of this experience is that it is a mistake to believe that good times will never end. No matter how hard the folks in Washington try, they cannot repeal the basic business cycle. There will always be recessions as long as there is capitalism. In fact, the harder they try, the harder the eventual reckoning to follow.