Tag Archives: cash flow

Sales Don’t Pay the Bills

I wasn’t going to write about cash flow again for a while, but I recently received an email taking me to task for saying in a prior article that “Sales do not pay bills—cash does.” The writer’s point being, that if you don’t have any sales, you won’t have any cash.

And, of course, that’s true—up to a point. Continue reading Sales Don’t Pay the Bills

The Secret to Improving Your Cash Flow

Yes, there is a secret to controlling your cash flow. It should be obvious to all—but it is almost universally ignored. Here it is….

If you find yourself in a hole, stop digging.   —Will Rogers

The companion to this profound statement is….

Sales do not pay bills—cash does.   —”Common sense”

 O.K… actually there is nothing secret, magical, or mystical about these two statements… other than the fact they are ignored by almost all business people—most of whom eventually find themselves in a cash flow bind.

Some of you may ask, “How do these statements affect me?” That’s easy to answer: If you can’t pay your bills, you had better study these statements very carefully.

But, if your business is profitable, and you’re rolling in cash, ignore this entire article and move on your merry way—at least until you find yourself in the proverbial “hole.”

All right, how do I get out of this “hole” once I admit I am in it?

If your business is having trouble paying its bills, I would start by immediately instituting the following steps:

  1. Determine just how bad your cash flow problem is—how deep is the hole? You can do this by calculating and analyzing your business’s “vital signs.” The article posted just prior to this one—Profitable—And Failing—explains how you do that. This step is not optional!
  2. Stop digging! If an upcoming expense doesn’t immediately generate cash—postpone it. No exceptions! Remember, sales do not pay bills—cash does.
  3. Create a daily cash flow model that goes out several months, and then expand it into a weekly model that goes out 12-18 months into the future. This model should have detailed payables forecasting capability, and should be updated regularly. This is especially important to businesses that are affected by seasonality.
  4. Know well in advance when each penny received will be spent—and on what. Typical Cash Flow Statements are fine, but they are historical. You need to plan your future cash flow.
  5. Defer any expense that either does not generate immediate cash, or keeps the doors open. (I know I am repeating myself here, but this is the most important step you can take when you can’t pay the bills you already have.)
  6. Defer adding any kind of fixed asset.
  7. Negotiate special payment terms with vendors wherever possible.
  8. A common recommendation is to string our your payables and live off vendor credit to conserve cash, but, if you are in serious cash flow trouble, you have likely done this by default already.
  9. Liquidate obsolete or unusable inventory.
  10. Set up scheduled payments for larger vendor accounts.
  11.  If you have a bank loan, and you are affected by seasonal business, negotiate skipping payments during the off-season.
  12.  Sell assets you are not currently using.
  13.  For assets you are using, try selling them and leasing them back.
  14.  Minimize money you currently take out of the business for personal compensation.
  15. Schedule any bonus compensation payments for periods of high cash flow.
  16. Lease out any excess space or capacity you currently have.
  17. Don’t fall for the old adage that “sales will cure all ills”… more sales only temporarily mask over inherent operational problems.
  18. You are never too busy selling and growing your business to work on cash flow.

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These are only a few ideas for addressing any cash flow crunches you may have, but they should at least get you into the right mindset for addressing those problems.

Very few businesses work enough on projections and analysis of their business. Simply trying to increase sales, or improve on their better mousetrap, will rarely result in a successful business. Just ask the over 5 million business owners who fail every year.

What do you think? Do you do enough cash flow planning and performance analysis to make your business successful in the long term? Or, are you one of the “I don’t need to plan, I just do it” bunch—which, by the way, comprise a large section of the 5 million annual business failures?

In the next post, I am going to discuss the popular myth that a business owner should only work “on” their business, not “in” their business.

Watch for it and tell me whether you agree with me—or the popular “don’t work ‘in’ your business” gurus of the day… which, in my opinion, is one of the leading contributors to cash flow problems.


Profitable—And Failing!

Before you finish reading this article, more than 10 businesses will close their doors for good in the U.S. You can read the details of this statistic here.

The reasons for this sorry state of affairs are many and varied, but one of the main reasons is poor cash management. For quite some time I have been hearing the lament “… I’m making a profit, but I can’t pay my bills.” Actually, cash crunches often occur at the same time that business is booming.

Woman with unpaid bills1

The underlying problem is that way too many business owners fail to focus on liquidity. They do not realize, or understand, that cash is the lifeblood of their business. It comes as a shock when they are clobbered with a cash squeeze while their business is profitable.

How does this happen? Well, the answer is really quite simple: most business owners are so busy “selling” and growing their business that they take their eye off the “vital signs” of their business’s health.

What are these vital signs? There are several, but the ones that are usually ignored are found on the Balance Sheet of your business’s financial statements. These vital signs are the ones that bankers and investors usually study in great detail—and are usually the ones that cause the most loan turndowns.

Here is a list of the bare minimum of vital signs that every small business owner should be closely monitoring—and then changing their business practices to improve them:

Current Ratio

This is simply your Current Assets divided by Current Liabilities. This gives an indication of how likely you are to pay your bills on time. A ratio of 1:1 is absolute minimum (otherwise you will likely not be able to pay your bills). A ratio of 2:1 is generally considered as the desired minimum for a successful business.

Quick Ratio

This ratio is calculated by adding cash and receivables together, and dividing them by Current Liabilities. This is often called the “acid test,” because it concentrates on the liquid assets of your business. A desired quick ratio would be at least 1:1. It should be noted that your receivables need to be “clean”—that is, no questionable or uncollectible receivables should be included… otherwise, you are only fooling yourself.

Working Capital

This is simply Current Assets minus Current Liabilities. This is like a revolving fund of money that is needed to carry out your day-to-day business activities. A lack of working capital is usually the bane of most small businesses and is routinely blamed (often falsely) for the large number of business failures.

Net Worth

This is your Total Assets minus Total Liabilities. It gives an idea of what your business is worth, and is most valuable when following the trend—is it trending up or is it trending down?

Leverage Ratio

There are several different leverage ratios, but, for small businesses, this ratio is usually calculated by dividing Total Liabilities by Net Worth. This ratio indicates how much your business relies on debt to operate. It is sometimes called “debt to equity” ratio. Obviously the lower the ratio, the better. Anything above 1 is a red flag that there may be too much debt for the business.

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These are only the bare minimum of vital signs from your Balance Sheet, and each industry has their own vital signs that should be added to these. Then, of course, there is the profitability issue that also needs to be followed on your P&L statement.

So, if your business is having trouble paying its bills—even though it is profitable—it would be a good idea to check out the “vital signs” of your business to determine just how “healthy” your business is… you might be surprised.

Next week I will be posting an article on things you can do to improve your cash flow—so watch for it.

Have any of you ever experienced a cash crunch while running a profitable business?