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Why Ignoring Cash Flow Can Kill Your Small Business - NerdWallet

“Cash is king,” as the saying goes. Or, more accurately, cash flow is king for small businesses and startups.

Too many small businesses and startups in the San Francisco Bay Area and Silicon Valley do not manage or forecast cash flow well. All too often, the strategic and operational focus is solely on sales and revenue growth. The dangerous, underlying assumption of this strategy is that a company can solve its problems just by getting larger.

However, as this recent post on Nerd Wallet highlights

“Even for profitable companies, it can be a challenge to make sure that more money is coming in every month than is going out. Inventory, accounts receivable, vendor contracts and payroll all must be managed effectively so companies don’t lose out on needed investment and growth due to a shortage of working capital.”

Here are some other key points from the article:

“Statistics show upward of 50% of businesses fail. In many cases, these are profitable businesses, but they close their doors due to poor cash flow management. While the primary concerns are obvious, such as meeting payroll or paying a supplier, it’s the ripple and compounding effects of consistently poor cash flow management that can be truly damaging.”

“Small-business owners often make decisions based on the expectation of receiving cash in the future, and when that doesn’t happen, it can put them in a cash crunch. This isn’t to say you shouldn’t account for future receipts (as this is important in modeling cash flow), but rather you should be realistic as to when such receipts will be received. If an invoice owed to you is due in 30 days but the customer has always paid 15 days late, you should account for the additional delay when projecting cash flow.

“It’s important that small-business owners continually monitor their cash flow process to ensure their expectations are in line with what actually happens. This will help build conviction and reliance upon the process.”

“In general, it’s a good idea to hire an independent consultant to establish the framework and teach the business owner how to utilize cash flow. This provides a resource to call with questions and leads to a deeper understanding.”

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