Stay Afloat With Positive Cash Flow
By Iain Williamson | April 1, 2011
You may have heard the old adage "Profit is an illusion, cash flow is fact." Sounds flippant? Perhaps, but, in truth, it's a maxim every business owner would be smart to heed. Essentially, it underscores the differences between a typical profit-and-loss statement and cash flow, which is the lifeblood of any company.
Take a look at the money coming into your business. If you're in retail (or run any other business-to-consumer enterprise), you probably get paid up front. Or, it may take a couple of days for the money from sales by credit card to be deposited into your bank account.
On the other hand, if you run a business-to-business enterprise, you probably have to offer your customers payment terms—usually 30 days. In reality, terms of 30 days often mean that you won't see your money for 45 days, 60 days or even longer. (Now, you can scream at your customer over the phone, but, if you scream too loudly, you may lose the customer!)
Financing your customers
When you issue an invoice, it is entered as a sale and as an account receivable in your books. As such, it contributes positively towards the profit in your profit-and-loss income statement—but it's still an "illusion." Unless you go to a bank or a factoring company and borrow against the receivable, you may not see that money for almost 60 days.
On the flip side, if you're new in business and haven't yet established a good credit rating, you may have to pay your suppliers on the spot—cash on delivery. In essence, you are financing your customers.
You may say that's not fair, but any decent-sized customer with a good credit rating will expect to be offered trade credit. If they're not, they will simply shop elsewhere (unless, of course, your product or service is unique).
To add to the cash crunch, when you started your business, you may have purchased equipment, computers, supplies and inventory. You may also be renting premises, hiring workers, paying for advertisements and other expenses.
Project and subtract on a regular basis
The goal, of course, is to break even and achieve positive cash flow—sooner rather than later. To track this, you should project your incoming cash and subtract your outgoing cash on a weekly or monthly basis, which can be done with a calculator and some columned paper. Alternatively, you can use spreadsheet software or a basic accounting program.
Whatever method you choose, this careful monitoring will ultimately signal when you can stop eating Kraft Dinner and move on to filet mignon!