One of the biggest reasons businesses fail is that they run out of cash. At the end of the day, it’s not the amount of money that you make that matters, it’s what you keep. Consistent and predictable cash flow allows a business to keep its operations going. I have worked with many clients over the years who continue to turn a profit and yet still struggle to cover their bills and payroll every week. One of the questions I’m asked the most is “If I’ve made money this month/year how come I don’t have the cash to show for it?” Sound familiar? The truth is there are several things that contribute to your cash flow that aren’t going to show up on your profit and loss statement. If you feel tight on cash here are a few things that may be the culprit, and some suggestions to help turn things around.
Accounts Receivable
If you have quite a few customers that still owe you money every month this is certainly going to contribute to less cash in the bank. It may be time to change up your billing process, such as creating new payment terms or requiring a deposit from certain customers. You should also have a system to consistently follow up on past due invoices.
Inventory
When you buy inventory, cash in the bank goes down. If you’re buying more inventory than you’re selling, this creates negative cash flow. Then you have inventory sitting in your warehouse/office/house that isn’t generating any revenue. Make sure you’re buying inventory strategically. Forecast what you realistically think you’re going to be selling, and don’t over-buy.
Owner Draws
You started your business to earn a living, so of course it’s expected that you’ll be pulling money out to support your lifestyle. However, problems can arise if your lifestyle is draining your business. It’s important to make sure your personal finances are also in order, and that you’re only pulling out what you truly need to live on. It is also a good idea to have a plan for taking money out – create a payment schedule and set amounts, more like a true salary. This will help with your personal budget and forecast your business cash flow accurately. Depending on your business structure, it may also make more sense to put yourself on payroll.
Debt
Taking on debt can certainly add to your cash in the bank but repaying debt will reduce it. If you’ve had to pay back loans that could be a perfect explanation of why your cash flow is tight. Debt can be a great way to increase your working capital, but you need to pay attention to the repayment schedule, and how that’s going to affect your cash flow going forward. Debt is not always bad, it’s just important to take on the right debt at the right time.
Remember, It’s not what you make (profit) that matters, it’s what you keep (cash). Making sure you have enough cash in the bank to cover not only your expenses but these things I’ve mentioned above will set you on the right path to a growing and more profitable business.
