Why can’t I pay my bills? In order to keep your doors open not only do you need to manage your revenues, costs and expenses properly, but you also have to monitor your cash inflows and outflows. A company may sell goods or services, send the customer an invoice requesting payment, yet not receive the cash from the transaction until a later time. Even if you are in a business that receives its cash immediately at the point of sale, the timing and management of CASH FLOW is critical for meeting obligations.
What are my obligations and needs? Your obligations are paying employees in full and on time and paying down interest and principal. Hopefully, your needs are investing in more inventory, general upkeep of your store location(s) and ensuring your manpower number is efficient. There are also times when sudden infrastructure upgrades become necessary. Taking into account how much cash will be needed to purchase more inventories is critical to grow your gross profits and cover your obligations and needs. Don’t be a business owner who focuses too much on profit and not enough on cash flow.
How do I forecast cash flow? Forecasting cash flow is very similar to profit and loss forecasting. The difference is that you include all cash inflows and outflows, not just sales revenue and business expenses. You must include loan payments and transfers of personal money into and out of the business, taxes and other money that isn’t earned or spent as part of your core business operation. Remember that sales peak at different times during the year, yet various expenses similar to insurance might have to be paid during a down month. If your business is a credit business you really aren’t profitable until those funds flow into the business. IF YOUR CASH FLOW FORECAST DOESN'T PLAN FOR SUCCESS, YOUR BUSINESS COULD FAIL DESPITE INCREASED SALES.
Build a reserve cash fund. In the short term, a business that’s growing can realize more money going out than coming in, as it spends more with suppliers for an increasing inventory and the hiring of more employees to handle increased sales to keep up with increased demand. What happens when a supplier raises their pricing 35% without notice and you find yourself needing even more inventory quickly, just to be able to increase your sales enough to pay the increased cost? What if the roof leaks and destroys your inventory? Insurance will likely cover much of the loss, but in the meantime your fixed and semi-fixed expenses continue and will need to be paid. If you do not have the cash flow for a reserve cash fund, you should obtain a loan with a bank to create one. Don't end up going to the bank after it's too late!