Keep the cash flowing

More Resources

To find cash flow templates or to learn more about how to use a cash flow statement as a management tool, visit these web sites:

www.Mainesbdc.org (Click on Information Library.)

www.sba.gov/starting_business (Click on Understanding Financial Statements.)

www.entrepreneur.com (Click on Financial Management.)

www.onlinewbc.gov (Click on Business Basics and then Accounting and Finance.)

www.buzgate.org (Click on State of Maine and then search cash flow.)

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My husband, Olin Smith, offered a common self-employment complaint as he checked the mail one day: "You know, people think the hard part is finding the jobs, but the hard part, really, is getting paid." The day's mail hadn't included his client's check.

He was struggling with collections for his Portland video production company, often the trigger for a common and costly small business malady — a cash-flow problem. Even temporary cash shortfalls can eat away at profit. If left unchecked, they can quickly reach crisis level where the cash flowing into a business is chronically out of sync with the cash flowing out.

After having downsized his company, Motion Media, seven years ago to enjoy a stint as a mostly stay-at-home Dad, Olin was ramping up his business again. To keep pace with the expansion, he realized that he needed to fine-tune his cash management practices. For guidance, we consulted Greg Gould, the "cash flow guru" at the Maine Small Business Development Centers (Maine SBDC) Lewiston/Auburn Service Center at Androscoggin Valley Council of Governments in Auburn.

"Focusing on your income statement is not enough," said Gould, a certified business counselor. "It's possible to have positive income and a negative cash flow." Gould said that while an income statement may look good because of substantial receivables, the cash flow statement may paint a more realistic picture of when a business can actually expect to receive the income and how that matches up with anticipated expenditures for the month. Delays in sending invoices, slow-paying customers, failure to communicate payment terms to customers or up-front inventory costs may explain why actual cash flow activity doesn't match the income statement.

According to Gould, a cash flow statement helps the business owner track operating cash flow (generated from sales of business products or services), investing cash flow (investment in fixed assets and use of cash beyond normal operations), and financing cash flow (such as cash from external lenders). Gould encourages a daily practice of working with a cash flow statement, even if only for 15 minutes each day. "Regularly tracking one's cash flow will help identify any issues as early out as possible, giving you time to develop meaningful solutions," Gould said.

Good cash flow management, according to Gould, includes developing realistic estimates for when the business expects payables, understanding where and when cash needs will occur and having a plan for meeting unplanned cash needs.

Some small businesses will use a credit card to make up for temporary cash shortfalls. Gould urges caution when it comes to levying credit in this way. "...if a credit card is used to cover payroll, for example, it may a case of borrowing from Peter to pay Paul."

A line of credit extended by the bank can better be used to manage a cash flow gap and, since it must be repaid relatively quickly, misuse is minimized. However, setting aside adequate cash reserves to meet shortfalls is the best habit, according to Gould.

Gould also cautions against a common reaction to sluggish cash flow: ramping up work so that a business can issue more invoices or make additional sales. This approach can suddenly increase expenses, exacerbating the cash flow crunch. That happens when increased out-of-pocket expenses occur in order to buy additional inventory, pay for additional staff, or buy raw materials needed for the work increase. When cash is tight, these new costs can cause additional strain before new cash starts flowing.

Companies can maximize their cash flow by making billing, collections and payable practices are as efficient as possible. In order for cash to come in promptly, bills should be issued promptly, according to Gould. "Watch your receivables and make sure you collect them on time and not let them slide past due," Gould said. And as for fears about how customers might respond to such pressure, Gould says to ignore them. "No matter, a customer who doesn't pay on time is not a good customer."

Building in some margin for losses will also help minimize cash flow crunches, said Gould. He recommends that a company plan for some uncollected receivables amounting to a half percent to two percent of total anticipated receivables. "It's just part of getting to the most realistic figures possible," he said.

Another option is to require clients to complete a credit application. One of the key pieces of information a business can obtain there is the name of a contact in the client's business office, someone who could be contacted to establish payment schedules in advance or to track down delinquent payments if necessary.

While the practice of regularly using a cash flow statement may seem unnecessary to some, it's essential to all businesses, according to Gould who warns that poorly managed cash flow can doom even profitable businesses.

Do you have tips for managing cash flow? Share them here.

Katherine Arno is the Director of Training and Communications for the Maine Small Business Development Centers (www.mainesbdc.org) in its Portland center at the University of Southern Maine. Kate owned her own small business in Maine for eight years. Today, aside from working with small business issues at Maine SBDC, she helps her husband with the small business that he has owned in Freeport for 12 years. She can be reached at Karno@maine.edu.

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