Managing Your Cash Flow

Figure out where your money is going so you can avoid a cash crunch--and business failure.
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Q: Can you give me some tips on managing the cash flow of my new business?

A: If there's one thing that will make or break your company, especially when it's small, it's cash flow. A banker once told me that of the many companies he saw go out of business, the majority of them were profitable-they just got in a cash crunch, and that forced them to close. If you pay close attention to your cash flow and think about it every single day, you'll have an edge over almost all your competitors, and you will keep growing while other companies fall by the wayside. The amount of attention you pay to cash flow can literally mean the difference between life and death for your company.

Let's take a look at some basics. What does "cash flow" mean, anyway? For the moment, don't think about profits and losses, your balance sheet, gross margins, etc. Perhaps the simplest way to think about cash flow is to just think of the balance in your checking account. Will that balance be enough to pay your bills when they come due? That's the point of this whole concept-the further out you can predict your bank balance, the further out you can see a problem, and the longer you have to deal with it.

As you start to think about it, you'll realize that you can pretty easily forecast most of your expenses, at least for the next few months. Once you have that in mind, add the revenue that you believe you'll receive, and do the math. Cash-flow management is simple in concept but can be complex in execution. Why? Partly because it's tough to decide how to get started, and partly because it takes serious discipline to consistently look at this when there are often more interesting things vying for your time.

Over the years, I've tried many different tools, and I finally settled on one that has saved my neck over and over: the "cash-flow spreadsheet," which accompanies this article. This sample version is intentionally simplistic; my experience is that this is a very personal tool and that if you adopt it, you will want to customize it to your own tastes. I have seen some very complex and powerful cash-flow spreadsheets that track every penny that comes in and out of a company.

There are a couple of ways to look at cash flow: prevention (manage the business such that you see problems coming and can deal with them early on) and cure (deal with problems when they get here). Prevention is by far the best option. If you plan ahead and look for problems as far out as possible, you can avoid many of them and lessen the severity of the ones you can't avoid.

In the end, if you've worked hard on prevention but still find yourself with an unexpected problem, what can you do about it? If you haven't been planning on this happening, you may face some painful choices: Borrow from your personal funds, delay paying some vendors, delay payroll, try to convince a customer to pay their bill early, etc. A much better plan is to have a close relationship with your banker. Don't make the mistake of treating your banker as an outsider; treat him or her as a partner, and send them frequent financial reports. The more a banker knows about your business, the more confidence he will have in you, and the more willing he will be to help out if you get in a cash crunch. Another important tool is a line of credit from your bank. Think of this as business overdraft protection for your checking account. If you've got that in place (and the time to look into this is not the day you need the money!) and a customer is slow to pay, you can draw on it until your invoices come in.

The bottom line with cash-flow management is to develop the tools and discipline to manage it constantly, look for problems as far into the future as possible, and set up a good plan for dealing with the problems you can't avoid.

Keith Lowe is an experienced entrepreneur who is a founder and investor in companies in several industries. Lowe also mentors new entrepreneurs; serves as past chairman of the board for Biztech, a nonprofit high-tech business incubator; and is a co-founder and officer for the Alabama Information Technology Association.

The opinions expressed in this column are those of the author, not of All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.

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