Cash flow is the key to success; good cash-flow management means a thriving business. "If you're out of cash, you're out of business," says Fred Parrish, executive director of The Profit Institute, a provider of outsourced CFO services. Financial management isn't just reading your financial statements. You need to look at your financial decisions with an eye toward the next six, 12 and 18 months of cash flow.
"Entrepreneurs think, 'If I'm selling products and I've got revenue, then I'm going to have cash,'" says Lea Strickland, president of business consulting firm FOCUS Resources, "but that's not necessarily so." Cash is what's in the checkbook you use to pay rent, utilities and payroll. If your bills are due every month and it's taking you 60 or 90 days to receive payment from customers, you're in a bind. Other signs of bad cash flow: Your revenue grows but your bank balance remains flat, inventory is rising faster than sales or you're constantly paying your own bills on the last day or even late. Communication with vendors is key here. Negotiate good terms upfront and be honest if you're having problems, rather than waiting until bills are past due.
The three founders of DMi Partners, an internet marketing firm in Philadelphia, know all about cash flow from their 2003 startup. Launched by James Delaney, 29, Patrick McKenna, 29, and Adam Weil, 31, the company was cash-flow positive in three months by keeping the focus on revenue-producing streams at all times and negotiating positive terms with vendors. Says Delaney, "We were able to find vendors we could work with without a significant capital investment. We could go out and get those leads, sell them to our clients and manage that cash flow accordingly." They built the cash inflows first and then built expenses based on what would generate more cash, earning them eight-figure sales last year.