Published March 5, 2001

Small Business Cash Flow Management & Simple Cash Management Techniques

"I have enough money to last me the rest of my life, unless I buy something." -- Jackie Mason

Money is the most important asset your business has. Without it - failure. You may have invested a great deal of resources and yourself into your business, but if you don't manage your cash flow, you can be forced out of business. You may make mistakes in managing your employees, your customers, or your physical facilities and you can survive, but don't mismanage your cash.

Such a situation is illustrated by the story of Helen. It is a tale of hard work, the lack of cash management and failure.

Helen, who owned a small commercial art studio, worked 12-hour days Monday through Saturday to meet her customer's demands and although she had only two employees and minimal expenses, she rarely drew a paycheck. Fortunately, Roger, her husband, earned a substantial salary, permitting Helen to continue working without an income. Helen had no idea of cash management. She struggled to pay her employees, her landlord and her vendors. To make matters worse, she fell behind in depositing the payroll taxes, and the IRS placed a lien on their home. She could not even turn to her accountant for assistance, as she was past due with his fees. Helen did not understand it. Her customers loved her. She was always busy. But, she was always broke.

Helen lacked business skills. Her financial records were a mess. Her customers owed her thousands of dollars that she never attempted to collect. And, she was never quite sure of the amount anyone owed her as she frequently forgot to prepare customer bills or post them to her accounts receivable.

Unfortunately, Helen was easy prey for unscrupulous people. She was generous, and sympathized with her customers when they explained why they could not pay her. Helen even acted as a surrogate mother to some, listening to their tales of woe and allowing her emotions to get in the way of good business practices. She rarely asked for her money. There was one particular customer who owed her $3,000 for more than three years, yet, she continued to do his work, spending her own money on supplies and labor. Sarcastically, someone said to Helen, "You might as well do the work for free and save yourself the trouble of bookkeeping."

Finally, after pressure from her spouse, she was willing to listen and accept financial advice. Helen's husband hired a business consultant to revamp and upgrade the accounting system and install a personal computer. Once the records were correct, the consultant called a number of customers to collect money. The situation improved, but barely, as many of the past due customers turned out to be dishonest. After a period of minimal success, Helen's old habits, of mismanagement, disorganization, and foolish generosity, returned. The consultant quit and eventually the business failed.

As I watched the business go under it was an example of an entrepreneur denying the basics of simple cash management. Helen created her own problems - her interest was creative, not managing her business. She failed to grasp the fundamental of any business - that it must earn a positive cash flow to survive. Helen's motives for being in business were cloudy at best.

Take the situation of Frank, in upstate New York, who owned a swimming pool supplies business and refused to send statements to his customers as in his opinion " it was the responsibility of his customers to keep track of their bills." He felt it sufficient to issue an invoice at the time of sale. Unfortunately, his customers did not, and he eventually was forced into bankruptcy when his cash ran out.

As any successful businessperson will tell you, cash management is a must. If you sell on credit, and cannot ask for your money, you should not be in business. If you do dislike asking for money, change your ways if you wish to survive. The cliché, "a squeaky wheel gets the grease" is appropriate to managing your cash flow. Never assume any of your customers will pay you on time. As it is in your best interest to hold on to your cash as long as possible, it is also in their best interest to do likewise. The phrase "ask and you shall receive" is a truism to success in business.

(C) Copyright 2001 Dr. Paul E. Adams. Syndicated by Paradigm News, Inc.