Brass Tacks: For all types of businesses, cash flow is king

Q. I operate a relatively new business, and my accountant tells me that, at this stage of development, cash flow is more important than profit. What say you?

A. Lumps of cash must be expended from time to time for capital equipment, facilities or inventory that won’t generate a comparable inflow of cash immediately. Also, customers aren’t generally inclined to pay your invoices on receipt. The products or services you’ve sold them probably required an outlay of cash on your part, but you’re not going to see cash from your customers for 30, 60 or even 90 days.

As a consequence, you have to carefully and frequently monitor the “ins” and “outs” of greenbacks to ensure that your cash obligations can be adequately satisfied. This requires you to compile a dynamic cash flow projection on an annual basis, at least. Keep in mind, a cash flow statement is every bit as important as the profit-and-loss statement. In fact, if your firm’s cash doesn’t flow properly, it may not survive to produce a P&L.

The statements you receive at the end of the year from your accountant are great historical records that will give you some insight relative to the things you did or should have done during the past 365 days. They may give you some guidance for the future, but the only sound way to vouchsafe the important liquidity of your firm over the forthcoming 365 days is to produce a statement of your own forward-looking cash flow anticipations.

Not an easy chore

At the beginning of every year, create a spreadsheet that shows the dollars that will actually flow in and out of your business each month for the next 12-month period. A 36-month projection is even better, since it will give you precious lead-time to fix a cash problem that might be lurking down the line.

Obviously, this isn’t an easy chore. But it must be done. Every anticipated source of dollar revenue and every outlay must be logged in the 30-day period in which it will occur. This projection enables you to determine how much cash must be available to sustain the level of business you expect. This exercise will certainly prompt you to be more aggressive in collecting your receivables. It also might trigger changes in your pricing and the arrangements you have with your own vendors. Often, it will cause you to look more critically at your operations with an eye to reducing cash-draining expenses.

This data also is a good indicator of the additional funds that you might have to borrow or otherwise source to sustain the business.

Great care should be taken in preparing these projections. A zero or negative cash balance means that payrolls can’t be met, materials and inventories can’t be paid for and other critical outlays like rent and taxes will be precluded.

Many entrepreneurs are surprised to discover that a successful, rapidly growing business can present the most severe cash problems.

Dollars in the pocket may trail sales by weeks or months, and in the interim a successful company’s immediate cash obligations will continue to expand. Therefore, accurate, detailed projections of actual “cash in” and actual “cash-out” are essential.

Use computers judiciously

While there are a lot of computer programs available that can help you with this chore, your first attempt to formulate a comprehensive, detailed cash flow projection should be undertaken with a pencil (one with a big eraser) and a large sheet of multi-columned ledger paper. Make each cash entry by hand, and do all the calculations yourself with a small calculator.

While this will be relatively slow and painful, it’s important that you understand every aspect of the financial flow of your enterprise and that you correct your mis-assumptions and errors as you move along. This laborious approach will force you to see the “whole” of your business undertaking, and trace through the critical interrelationships of each part.

Once you’ve sweated over this compilation you can transfer it to a Lotus or Excel spreadsheet (or something similar) so you can easily manipulate the data, test “what if” hypotheses, make adjustments based on revised operating tactics and keep the information up to date. You’ll probably have to tinker with the data considerably as you plot a course for your business that is in keeping with the cash you have or are able to source externally.

You’ll be surprised how this exercise will test your “street smarts” as a business operator.

But be careful. The whiz-bang efficiency of a computer makes it all too easy to believe that the numbers it spews forth are pristine and predestined. As a consequence, busy business operators often neglect the data-entry maintenance that is necessary to keep projections realistic and relevant. nhbr

Paul Willax is a professor of entrepreneurship and chairman of the Center for Business Ownership Inc., Amherst, N.Y. He also is the author of the book, “Brass Tacks Tips for Business Owners,” available at If you have a question or suggestion for his column, or to receive a free, weekly e-mail newsletter, “Brass Tacks BrainFood,” write to

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