Don't Get Caught in a Cash Flow Crunch

The three most dreaded words in the English language are "negative cash flow."

~David Tang

Running a business means having your eyes on an often dizzying array of processes, indicators, reports and external factors, especially if you're a small business owner. It also means spending a fair amount of time trying to predict and control where you and your company will be next year, next quarter or sometimes even next month.

Gaining and maintaining control of your cash flow can go a long way towards stabilizing your business and being prepared for the unknown.

Cash flow, as I've talked about before, is all about how and when your money comes in and goes out. It isn't profit, and it isn't revenue. Both of these numbers are important in their own right. But while you can work on increasing profits over time and gleefully wait for revenue to arrive, if you're caught in a cash flow crunch it can bring your business screeching to a halt.


Most advice about cash flow starts with "use your past cash flow to create a 12 month rolling estimate." So, ideally you already have a long history of data to take advantage of. Knowledge over time makes predicting the future a lot easier.

If you don't have a lot of data, you probably have a pretty good idea of what expenses are coming up over the year. Map these out and do your best to predict your cash inflows. Then start tracking all those inflows and outflows. As the months pass, you'll gain insights that can help you refine your business and services and help you evaluate the effectiveness of sales and marketing efforts.

Being able to dependably (or at least reasonably) predict your future cash flow also helps you figure out future funding needs. Knowing when you might need a loan or further investment monies gives you time to get your ducks in a row.

Even if you're not sure when and if you'll need a loan or investment though, it's a good idea to start doing the groundwork while you're solid and solvent. Ironically, arranging for a line of credit is much easier when you don't actually need the money and you'll most likely get better rates. Having that credit in place in advance means you don't have to scramble or find yourself at the mercy of an unscrupulous lender or investor.

On the more immediate front, there are several steps you can take to maximize your cash on hand and prepare for possible shortfalls without derailing your progress.


Of course you can't just not pay for things, that's obviously not going to work. On the other hand, you don't necessarily have to pay for everything up front. Negotiating terms with your suppliers can be crucial to your cash flow. An extra week or two can make a world of difference, especially if you've extended credit to your customers. Knowing your cash outlays and their due dates is key to planning.

Be clear on your "must" pays before you think about anything else. Payroll, taxes, rent and utilities, debt payments and production materials come before all else. If you can't cover those basics this month, you certainly can't buy new machines or redo your office. You may not even be able to keep the doors open, so prioritize!

Consider using your business credit card, carefully, This requires real discipline and being pretty sure you'll have the cash on hand when the bill is due, as credit card interest charges are punitive. When you pay by credit card you not only have the grace period between when the statement is issued and when it's due, you can often earn cash back or bonus points to use elsewhere to offset costs.


Electronic banking coupled with today's accounting software can keep you current on your bills while making sure the cash isn't floating out there where you can't use it. Electronic funds transfers are faster and more accurate. Talk to your bank to see what online services they have available.

I recommend you use some sort of bookkeeping software. You can, of course, use simple spreadsheets to log transactions and you can probably even download your bank statements and use them with your spreadsheets. Unfortunately, most spreadsheets can't alert you to due dates or automatically integrate with your bank. Getting notifications for payments due and receipts not yet received can help you get a tighter grip on the reins of your cash.

Software and electronic systems can also improve cash flow by reducing outbound mistakes through a workflow system of checks and balances. They also help reduce the instances of fraud. In a 2014 survey, 82% of respondents reported that payment fraud was primarily accomplished through checks.

The last piece to have in place is a solid process to handle your accounts receivable and some back plans should things go awry. I'll cover that more in depth next week. Until then, look for Pocket Marty tips on twitter. If you have any questions, please send them along.


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Pocket Marty
Pocket Marty

Pocket Marty was born during a conversation with clients and friends talking about how they wanted to have a mini version of Marty on call 24/7 to answer questions or give an opinion...and not always about accounting.

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