Inc.com | Plug Those Cash Flow Leaks
With the new year underway, now is a good time to re-commit yourself to making money this year. It's the perfect time to get serious about creating financial success in your business.
And it's impossible to create true and lasting financial success in business unless you have the lifeblood of your business under control — your CASH.
Neglect your cash flow and you'll taste the pain and suffering that comes with failure in business. Take good care of your cash flow and you are on your way to financial security.
And the best way to take care of your cash flow is to stop making the same old mistakes every year that are literally draining your business of cash. Make the commitment to plug these cash flow leaks so you can put more of your hard-earned money in your pocket.
Here are three tips to help you plug huge cash flow leaks in your company.
- Understand Your Peak and Trough Cash Months
The peak cash month is that month (or months) where your cash balance is generally at its highest point during the year. The trough cash month is just the opposite. It is the month (or months) where your cash balance is generally at its lowest point during the year.
Here's where many business owners make a big mistake with their cash flow.
When they are in their peak cash month, they feel really good about their cash flow because they have a nice cash balance. Then they make decisions that use or commit that money not realizing that they are using cash they will need in order to get them through the trough month. The result is a "cash flow problem" when the inevitable trough month arrives and there is not enough cash to get through that period.
In my opinion, this is one of the major killers of small businesses today.
- Pay Special Attention to Capital Expenditures
Capital expenditures is a category that can surprise you unless you actively manage and control it each month. A capital expenditure is recorded on your balance sheet rather than as an expense in your income statement. The cost of the asset you purchased is then depreciated over the life of the asset.
As a result, you don't see the cost of that expenditure show up immediately in your income statement. It's this accounting treatment for capital expenditures that makes it so important that you manage it closely — very closely.
I worked with a client once that learned this lesson the hard way. They did a good job during the year of keeping their expenses in line with the budget. The big surprise came at the end of the year when the president realized that capital expenditures had more than doubled during the year. Capital expenditures totaled almost $200,000 for the year compared to less than $100,000 the previous year.
What happened? Management was so focused on the income statement and keeping expenses down that they let over $100,000 leak out of the company through the "back door." There was no capital expenditures budget. There was no accountability for how this cash was being used in the company.
- Watch Accounts Payable Closely
One of the things you want to watch out for is whether you are improving your cash flow by not paying your bills as they become due. I can't tell you how many businesses I have seen that boosted their cash flow temporarily by dragging out payments to vendors without ever addressing the underlying problem. The problem that needs to be addressed is the one causing cash flow to be so tight in the first place.
The fact they you have to pay your bills late should be like a fire alarm going off next to your ear. If you ever get to the point of not be able to pay your bills on time, stop and take the time to find out why. Is it an accounts receivable problem, an inventory problem, a revenue or expense problem, etc. Find the cause of the problem. This will put your attention on the area of your business that is leaking the cash. Then you can put your time and energy into plugging the leak.
Remember, your success in business will ultimately be determined by the degree to which you create, and hang onto, your cash flow. One of the most rewarding activities you can undertake is to become maniacal about understanding and closely managing each area of your business that creates or uses cash.
(You can get a head start on this process by checking out my recent column where I shared with you a powerful secret for formatting your cash flow projections in a way that provides a crystal-clear view into the true cash flow of your business.)