Lucky you! Your sales pitch is working and clients are stacked up like planes landing at O’Hare. Receivables are numerous and the balance sheet rocks. So how can it be that you almost didn’t make payroll (again)? How can you come up short on cash, with all the business you’re creating?

Like so many business owners, especially those who are new or who suddenly acquire a competitive advantage that creates a tidal wave of business, you did not recognize the signs of an approaching cash-flow crash, independent of how much money would eventually flow into your coffers.

You placed your primary focus on creating business (which is vital), but neglected to monitor the ebb and flow of revenues and expenses (which is vital). Every business owner must keep an eye on the money and take corrective actions as needed if we want to build a thriving business because quite perversely, as sales go up, cash-flow might go down.

Here’s how cash-flow crashes happen. As business expands, staying on top of accounts receivable becomes more time-consuming. Those in service businesses (like website design or public relations) may find that clients, oftentimes those whose names we crave for our client list, may unilaterally decide to pay receivables in 60 days, instead of 30 days. Meanwhile, you have payroll and other operating expenses that are due ASAP.

Improper pricing is another cause of cash-flow crashes. You may sell a ton of T-shirts but if the profit margin is too thin, excellent sales volume may not overcome an inadequate mark-up. Revenues generated may not cover expenses. The remedy is to either acquire the product less expensively, or raise the price.

A growing business brings up still more issues that keep its owner awake at night: capital expenditures. You must decide whether or not and when to upgrade office equipment, open a new office or move to larger quarters, or hire more workers to keep up with the growing number of customers.

Fail to invest in capacity and you leave money on the table, along with dissatisfied customers who can kill you on social media. Get fooled by the romantic delusion of further growth, invest in demand that never materializes and you are stuck with potentially crippling debt that can bankrupt the business.

It’s quite the dilemma and only the best fortune-teller can give the right answer. John Terry, of Churchill Terry business advisers in Dallas, TX, recommends that business owners focus on one question only when evaluating the possibility of making large capital investments: will it bring money in the door? If not, find a less expensive alternative, or learn to make do without it. Successful business owners learn to preserve and protect liquidity. Here are other actions to take:

  • Hire a savvy bookkeeper or accountant to function as the business controller (full or part-time)
  • Each week, collect the data on key financial indicators: accounts payable, accounts receivable, available cash and the quick ratio (cash + receivables / current liabilities + accounts payable) to monitor that all-important liquidity
  • Each month, collect the data on these indicators: accounts receivable turnover ratio (how long does it take to get paid?), the operating cash-flow ratio (cash-flow from operations / current liabilities) and the pre-tax net profit margin

It is imperative that you are able to pay obligations when they are due and for that you need cash in hand. Analyze the above indicators weekly and monthly and learn what is really happening behind the scenes of your business. Track the trends of available over time.

Seasonal variations may become evident. You may need to step up receivables collections, or approach certain clients about speeding up payments. You may start to request more money up-front before taking on certain projects, so money will come in faster. You may trim expenses and raise prices. The decision of whether to invest in capital upgrades will become clearer.

There are software programs to track important data and help business owners resolve problems and set priorities. Accounts receivable, cash, inventory and liquidity can be monitored, along with confirmation on whether the business is on target to meet budget and revenue goals. For those businesses that get lots of repeat business, it is also possible to track the profitability margins of key clients.

Thanks for reading,