Your online marketing is paying off, and your business is growing by leaps and bounds. Congratulations – and now watch out, because you’re entering the danger zone. Growing companies often run into cash flow problems that can end up putting them out of business at the very time when it seems like all is going well. How does this happen?
Cash flow refers to the flow of money in and out of your business – your income and expenses. It’s not a lot different from managing your personal checking account. If your income is larger than your expenses, you’re cash flow positive. If your expenses outstrip your income, you may be heading for trouble.
To protect your business from cash flow crises, start by understanding what cash flow is and isn’t. Cash flow is different from sales. A business can have soaring sales on paper but still be cash-poor in reality. For example, if your e-commerce business just bought lots of inventory for the holiday shopping season, but you haven’t yet made many sales, you could be at risk of a cash flow problem. Slow-paying customers, especially in B2B fields, can squeeze your cash flow through no fault of your own.
The best way to prevent cash flow problems is to monitor your cash flow on a regular basis. If you use accounting software, it’s simple to create a cash flow statement. Depending on your current situation, you should review this weekly, or at least monthly, to know where you stand. For example, if you have a big loan payment due at the end of this week, you’ll know you need enough cash to cover it.
Reviewing your cash flow statement will also reveal the causes of cash flow shortages. For example, you might realize that your biggest customer consistently pays invoices in 90 days rather than 30. Once you've identified problems like this, you can take steps to deal with or correct them. For example, you may need to require partial payment from certain customers upfront or restrict others to COD terms. Sending out your invoices ASAP and accepting electronic payments will also help you speed up receipts.
When you've gotten familiar with using a cash flow statement, the next step is developing a cash flow forecast. Use your previous cash flow statements and your current sales forecasts to help you estimate cash flow for the next three, six or 12 months. Cash flow forecasts are especially useful for businesses that have seasonal ups and downs. Be realistic in creating your forecast, since the goal of a cash flow forecast is to help you prepare for the worst—not to assume the best.
If managing cash flow still sounds complex, your accountant can help show you how to use a cash flow statement, create a cash flow forecast and what to look for. Once you have a grip on your cash flow, you'll be ready to invest in the equipment, products and inventory your growing business needs.