New Ventures Need Cash Flow To Avoid Running Out Of Fuel
Cash, in a consistent and predictable flow, is the fuel that propels every business. According to one of our readers: “I’ve been in my own business for two-and-a-half years, and the biggest lesson I’ve learned is the importance of cash flow. I hope you can make your readers appreciate the need for a steady flow of dollars in a startup business.”
Indeed, cash is king, especially in the new venture where it’s scarce, and its ebb and flow is unpredictable. For the first few years of operation, a company’s cash flow statement is arguably more important that its profit and loss statement.
The P&L is a revealing report that tells you how your firm performed financially during a recent period of operation. It provides a good, all-in, reflection of what happened. In comparison, a cash flow report helps an owner keep a good handle on what is currently happening. In fact, if a firm’s cash doesn’t flow properly, it may not survive to produce a P&L.
When starting a venture, an entrepreneur must produce a spreadsheet that shows the dollars that will actually flow in and out of the business each month for a period of at least two years. Obviously, this is not 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 is to occur. This projection enables the venturer to determine how much cash must be available to start the business, and it is a good indicator of the additional funds that might have to be borrowed or invested as the business grows. Careful, daily monitoring of this statement will enable the owner to make necessary adjustments.
Many entrepreneurs are surprised to discover that a successful, rapidly growing business can present the most severe cash problems.
Sales are one thing. But collecting the dollars those sales represent is an entirely different matter. Dollars-inthe-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.
Q: “At what point should I turn my accounts receivable over to a collection agency?”
A: It depends on the general practice for the industry in which you operate, but you shouldn’t wait more than 90 days to seek experienced help with a delinquent account. Remember, the longer you wait, the less you will probably recover.
Furthermore, your firm, in effect, acts like a bank for your delinquent customer, with a cash loan that is costing you money and producing no return. This “unavailable” cash can also restrain your growth and operational flexibility.
Collection agencies can be a big help, but the best course of action is to have an aggressive but tactful, inhouse follow-up on receivables from the day they become due. Many nouveau entrepreneurs are afraid of alienating new customers with timely requests for payment. But keep in mind the advice of my ol’ uncle Ollie: “The best customer is a paying customer. Some business just ain’t worth havin’.”
If you have a question of suggestion for this column, call 1-800-237-6118. Paul Willax is the C. Paul Sandifur Distinguished Professor of Entrepreneurship at Eastern Washington University.