Leadership

Avoid cash-flow calamity

Written by ProfitGuide

Cash-flow management only sounds dull until you think of it this way: if you run out of cash, your business is toast. This isn’t a theoretical risk, but one to which growth companies are especially vulnerable. As Philip Campbell writes in The 7 Deadly Cash Flow Sins (and how you can avoid them), it’s worth spending some time to minimize that risk. His advice includes:

  1. Only count a sale once you’ve been paid. A sales upsurge can be disastrous if your cash runs out while you’re waiting to get paid. Your staff needs to understand the importance of collecting from customers. One way to focus your salespeople’s energies on this is to pay commissions only after the money has been collected.
  2. Don’t mistake profit for cash flow. Many business owners figure that if their financial statements show they’re making a profit, then their finances must be in good shape. But financial statements measure profit or loss, not cash flow. To manage the latter, you need to set up a schedule tracking your beginning and ending cash balance for each month.
  3. Don’t overspend just because your cash balance looks good. Almost every business has a month or a part of the year when its cash balances are at a peak, and another when they’re in a trough. It’s easy during peaks to use or commit too much of that nice cash balance, leaving you in a cash crunch during your trough. Include in your cash-flow schedule a projection of the expected swings, then account for your expected balance in the trough in every financial decision.
  4. Pay your vendors on time. The advice many financial professionals offer to delay vendor payments as long as possible is a terrible strategy. It will damage your reputation with vendors and make you look weak. In contrast, a reputation for paying promptly is worth 10 times more than any interest you would earn by paying bills late. It can also give you an edge against large corporate rivals that alienate vendors with the excuse that “corporate pays the bills, it’s just their policy to pay late.”
Originally appeared on PROFITguide.com
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