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Three tips for managing your company’s cash flow

If you let the new business failure rate be your guide, you might never start your own company. Only 50 percent survive the first four or five years. Many former business owners who returned to a less-than-satisfying 8 to 5 job might tell you that their business hit the rocks when it ran out of cash. Of course, many factors can contribute to business failure. But an owner's inability to manage cash effectively — whether from neglect, lack of skill or inability to restrain spending — is a sure harbinger of trouble.

But don't the income statement and balance sheet provide a complete picture of the company's financial viability? Not necessarily. For example, your company's net worth may be climbing year after year, while cash balances are being depleted. Or, your business property is appreciating in value and your accounts receivable are increasing. Both contribute to a positive net worth, yet neither bolsters your bank account directly.

To generate cash, assets must be sold and receivables collected. Both take time. Meanwhile, cash must be available to cover ongoing expenses such as rent, payroll and utility bills. Consider these three tips for managing your company's cash flow.

Analyze cash every month. This doesn't have to be a complicated procedure. Simply prepare a schedule that shows the cash balance at the beginning of the month, then add cash you received (from sales, collections on receivables, asset dispositions, and so forth), subtract cash you spent, and calculate the ending cash balance. If your cash balance is decreasing month by month, you have a negative cash flow. If it's climbing, your cash flow is positive.

Anticipate cash flow needs. Perhaps your sales generally decline in the summer months. Build up excess cash in the good months in expectation of covering payroll costs and fixed expenses every summer. Track your cash flow for a few years; then use that analysis to help you develop a more accurate forecast. To smooth out cash flow, you might also consider establishing a line of credit that can be paid back as cash becomes available.

Establish good credit policies. Set limits for extending credit. Ask new customers for business references. Send out invoices the same day goods are shipped and charge late fees for clients who don’t pay their balance on time. When payments don't arrive, send out collection letters promptly.

Manage cash well, and your business stands a much better chance of surviving the challenges of today's economy.  If you have questions about managing your specific company's cashflow, contact a Dugan & Lopatka professional at This email address is being protected from spambots. You need JavaScript enabled to view it. or (630) 665-4440. 

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