Virtually all business owners and entrepreneurs have experienced that oh s@#t feeling of not being able to make payroll or have enough cash to pay the bills at some time in their tenure. Especially when a business is new, this is to be expected. Chronic shortages of cash on an ongoing basis are NOT normal, nor should they be acceptable.

My experience is that small business fall into one of three categories:

  1. Profitable, stable, well-capitalized businesses where cash flow is predictable and the need for monitoring frequently is not critical.
  2. Fast growing, marginally profitable, or undercapitalized businesses where cash flow is always an issue.
  3. Any other business that doesn’t fall into the first two categories.

Businesses in the first category can survive with doing a cash flow analysis on an annual basis without too much risk. This assumes that nothing radical changes in between regarding their profitability, competition or capitalization. Cash flow is still necessary to determine growth plans, capital purchases, debt repayment, shareholder distributions and the like.

Businesses in the second category know they have cash flow problems, but generally are reactive in their management of cash. Squeaky wheel gets the oil, and hope that tomorrow is better. These types of businesses usually don’t survive. Unless a proactive determination is made to stop the leaks and execute a plan to improve, the owner usually hangs on to the bitter end, when there is nothing left to salvage.

The third category is where most businesses reside, and it is the most dangerous. The danger is that the owner doesn’t know if there is a problem, and is not prepared when the realization comes. These business owners look at the bank balance, and if it is positive or in the range they expect, then all is good. When something like employee theft, obsolete inventory or an unexpected tax bill show up, the business quickly moves into the second category, struggling for survival.

Most business owners are optimistic by nature, or they would never have started their business. This leads them to assume things are okay, and that management of cash is not necessary. I empathize with them because I am them! But if you have a commitment to take your business to the next level, and make it sustainable, you must have a cash management process in place. Generally, this starts with an operational budget. I know that isn’t what you wanted to hear, and it certainly isn’t what you want to do, but quite frankly, to not put together operating and cash flow budgets are irresponsible.

The budget process really isn’t as bad as you would think. If you aren’t sure where to start, contact your CPA or other financial advisors. If you’re intimidated by the uncertainty of a whole year, just work the next 90 days. We’ve put together a brief article on where to start in managing your cash. Click here to access 7.5 Ways to Improve Cash Flow.

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