Even in a good economy, about one-third of new small businesses don’t survive the first year. The No. 1 reason: poor financial
So how can a business survive in a bad economy? Smart cash-flow management is vital.
“The most important financial statement is not the balance sheet or profit and loss; it is the cash-flow statement,” says Larry Rice, CPA, the director of strategic consulting for Rodman & Rodman in Newton, Mass. “A very profitable company can still fail if the cash flow isn’t there to sustain that profit. Bottom line: More businesses fail because of poor cash flow than poor profit.”
Here are six recommendations from Rice:
1. Create a cash-flow projection or plan. Every small business should measure projected cash flow one year forward, and then update that projection quarterly.
A good cash-flow projection starts with a good sales projection. Use historical data and be sure to consider changes such as competition.
Once you have that sales projection, translate those sales into the time frames you get paid for those sales. When you place the payment alongside the receipt of revenues, you’ve created a cash-flow projection.
2. Plan correctly for capital expenditures. Due to an aversion of debt, many business owners pay cash for significant corporate assets. This can lead to a cash-flow disaster.
A good rule of thumb: All long-term assets should be financed over the expected life of those assets. If you are going to buy a machine that will last 10 years, seek to finance it over those 10 years. The idea is to match the outflows (the payment for the assets) to the time you expect to generate inflows (sales) from the use of that asset.
3. Tighten credit policies—and target the right customers. Eager to make any sales, some owners don’t have strong credit policies. The worst of all cash-flow problems is to expend all the resources to make a product or provide a service, and then not get paid for it.
Don’t be too eager to have just any customers. You need to have the right customers. Go after the customers you want, not the customers you will have to chase to get paid.
4. Manage suppliers. Small businesses often pay their bills at designated times, which often are too early. Bills should be paid timely to maintain good customer relations, but as close to the due date as possible. Seek opportunities for discounts for prompt payment.
5. Manage inventory. Owners often don’t want to sell stale inventory at a discount, hoping that some customers will pay full price. Consider getting rid of stagnant inventory and use the cash for more practical purposes.
6. Maintain a good relationship with a bank/lending officer. Not all credit decisions are objective. Sometimes, credit can be secured when you maintain an open dialogue.
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