Cash flow is the top challenge for just about every new business in the world.
Most people who are new to business are fearful, if not overwhelmed, by the financial side of the business. Not many new entrepreneurs have a working understanding of the financial terms, much less the reports, used by business finance professionals. How many new entrepreneurs understand the differences between and the implications of cash versus accrual accounting? Not many.
This is a problem because people tend to avoid, downplay and fear that which they don’t understand. Accounting and finance are no exception. Entrepreneurs who have little to no understanding of finance and even less available time to go up the learning curve on it are naturally vulnerable to financial challenges, if not disaster, in their businesses.
The key to overcoming this is to focus on cash flow, because that is what will kill your business.
It is not uncommon for a failed business to show a profit on its last income statement. It is not uncommon for a failed business to reflect more assets than liabilities on its balance sheet. But the cash flow report of every failed business shows zero available cash, and that is what kills businesses.
Cash flow is deadly when you are struggling to find two pennies to rub together in your new business and it is equally deadly when you are swimming in new sales but have no cash to pay for the people, equipment and services to execute all that new business.
In fact, ironically, a flood of new customers or contracts in the early years of a business is usually fatal simply because the business has no way to fund the execution of the sales.
The canary in the coal mine for all of these disasters is the cash flow report and projection. When you are a first-time entrepreneur, the cash flow report is your newest, bestest friend. When you are an experienced entrepreneur the cash flow report is just about the only financial data you pay attention to on a daily to weekly basis.
Cash flow projections will show you when you will have cash shortfalls in your business, such as when payroll, large accounts payables and annual supply orders fall in the same week. If you use your cash flow reports and projections well, you will be aware of those pending shortfalls and you can do cash planning to spread out your obligations over time or arrange for short-term financing to cover the deficit.
That last option, short-term financing, such as a credit line from your bank, is a shimmering mirage to most young businesses. A credit line only becomes a potential reality after you’ve built a solid financial track record over several years (often five) or, paradoxically, when you don’t need it.
But, you’ll never know you will need cash in the future or are need of cash this week if you don’t pay attention to your cash flow reports and projections.
My advice to most entrepreneurs is to essentially ignore the income statement and balance sheet but to sleep with a copy of the cash flow report and projections every night.
In startups and growing businesses cash is king. The only way you can manage, protect and nurture that most precious asset is to track it and plan for its needs via your cash flow reports and projections.
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