Your Small-Business New Year’s Resolution: Stay Cash flow Positive

In the 1960s, a young entrepreneur named Phil Knight began selling Japanese running shoes to retailers and track teams in the Portland area. He was doing well. His business was profitable. His customer base was growing. And demand was rising for his latest shoe, which was designed with a waffle iron. The future looked good. And then, suddenly, he nearly went out of business.

The problem with Mr. Knight’s business was that, although it was profitable and ready to grow, it was “cash flow negative.” In other words, he was investing more money in inventory and other expenses related to growth than he was taking in. Again, he was profitable. In a long-term sense, he was machining money. But too much cash was flowing out of his business in the short term, while not enough was flowing in – and, like most small-business owners, he didn’t have a large volume of capital to support a major cash deficit. When this happened month-over-month, Mr. Knight nearly lost everything. Fortunately, he eventually solved his cash flow woes, renamed his company Nike, and is doing well for himself.

Mr. Knight’s cash flow situation is not all that unique. Businesses of every industry encounter cash flow issues, especially small businesses, which often make major investments on new inventory and equipment without a solid safety net of cash. When those big investments are combined with fixed, regular expenses, like payroll and overhead, businesses can lose large volumes of cash in a short period of time – whether or not they are profitable. (A cash flow crisis can happen fast.) This problem is amplified by unpredictable delays in income, such as the business’ client invoices, which may be paid months after submittal, as well as delayed or unexpected costs like taxes and credit bills, which may come at a time when cash is already tight. If several of these factors combine to create negative cash flow, and this occurs for an extended period of time, an otherwise healthy business can find itself unable to meet payroll and forced to close shop.

…So, what is a small business to do?

First, begin monitoring your cash flow in real time. Cash flow problems are typically intense, short-term issues that are impossible to track if you are only analyzing your cash flow annually. Having a tight, monthly budget doesn’t solve this problem, either. While your budget can help monitor profitability, it is only a rough estimate of cash flow. A budget does not account for month-by-month disparities. It does not consider delayed invoices, credit bills and inventory expenses caused by rapid growth. And it will not tell you whether or not your business has the cash-on-hand to survive. For that, you need real-time cash flow projections.

Pay estimated taxes every quarter. Instead of paying a large volume of taxes in April – Who knows what your cash flow situation will be? – be proactive and pay quarterly. (Also, keep in mind: If your business is growing, so is your revenue, and so are your taxes due. Be sure to account for changes in your revenue stream when calculating your estimated tax payments.)

Prepare for the unexpected with a cash cushion. By nature, small businesses are going to encounter challenges and expenses that no one could have predicted. Maybe a new competitor disrupts your industry. Maybe you are the victim of a cyber-attack. Maybe you partner with a major new client, and you need to grow your staff, fast. As a small business in a dynamic financial world, you should always have some emergency cash on-hand for unanticipated expenses and investments (at least enough cash to meet the next payroll period).

Analyze your business’ historic data. Take a look at your company’s cash flow history and look for trends. Are there certain times of the year when you tend to be cash flow negative? Could you prepare for these seasonal droughts by saving cash? Are there opportunities for additional revenue streams during your off-season? There are many potential insights in historic cash flow data, and the knowledge gained there can be essential to your strategy.

Encourage prompt invoicing. Even the best clients can be sluggish and fickle with invoice payments, and this can cause serious problems with your cash flow. What if your biggest client is months late with a payment? You will be left without cash until they finally deliver. To prevent slow, inconsistent invoicing, streamline your clients’ payments. Don’t send paper invoices, which are time-consuming and energy-intensive. Instead, use software that makes payments as easy as possible for your clients, and remind them when they are late. If that doesn’t work, begin charging late fees.

The most important thing? Plan for the future. In addition to your short-term cash flow projections, which are critical, small-business owners should create a holistic, long-term cash flow strategy that incorporates future investments, taxes, the timing of invoices and bills, market trends, business growth, new expenses, and any other factors that can or will impact your cash flow. Instead of attempting to do this yourself, partner with a financial expert, an advisor who understands your business and has guided clients through similar situations.

Managing your cash flow is complicated. It requires expertise, diligence and proactivity, but it is essential to protecting your business today and planning for tomorrow.

Preparing for your financial future is challenging, but it is always worth it. As Phil Knight has said, just do it.