Tag Archives: profitable and failing

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.

* * * * *

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.