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Does It Take Money to Make Money?

When growing a small business, it does take “money to make money”, but not the way that the founder initially thinks. When I was doing angel investing about 10 years ago, I was frequently approached by entrepreneurs with a business plan that said “I only need a million dollars to get this company off the ground!” Many of these people waste so much money starting a business. In fact, I believe that too much money can actually make a business owner stupid! We see this during boom periods like the Internet Bubble of the late 1990’s where money was wasted since funding was so plentiful.

If cash is managed right, a small business owner can start with a lot less money. In fact, the average service company can start their company with less than $30,000, according to some studies. Making your cash go further will increase the company’s chances of success and will ensure the owner can draw a bigger paycheck.

Its cash flow, stupid. Most entrepreneurs think that growing a successful company is all about sales. In fact, it’s about managing your money or cash flow. Remember that sales are vanity and cash flow is sanity. It was reported in the presidential election of 1992, that James Carville, Bill Clinton’s campaign manager had a sign posted in their Little Rock Office that simple stated “Its the economy, stupid.” This was a reminder to everyone that worked at the campaign that the only issue that the race was about was the economy. That year, I started my third business after failing in two others. This time, I made my own sign and tacked it up in my office to read “Its cash flow, stupid.” It became my daily mantra. Starting out in my first business in 1980′s, I thought that the only thing that mattered was to sell my product. I reasoned that if I make sales, I make money. This worked great until customers didn’t pay me on time or at the same rate as my business expenses grew. In fact, growing companies need increasing amounts of cash. Even if my customers did not pay their bills when they were due, my employees and vendors still wanted to get paid on time. My employees were not interested in accepting my accounts receivables in trade for their salaries or promises that I would pay them in a few weeks. What I realized is that sales do not pay bills, only collected cash does. What your income statement says about profits in your small business can be meaningless. Only collecting the cash from sales really means something. Cash is the gasoline that makes your business engine work. Without cash, your business literally suffocates. All businesses fail because they run out of cash leaked through losses or other poor management practices.

Start here to improve your cash flow. First, have your accountant or your bookkeeper construct a cash flow statement monthly. Most basic accounting software packages have a standard report that will produce it in its most basic form. Learn what every positive and negative number on the statement means. If this is too difficult, at least look at your company’s checking account statement; did you have more or less cash at the end of the month than at the beginning? In financial terms, cash flow is defined as cash receipts minus cash payments received over a given period of time. It’s the flow of money in and out of your business that essentially determines your business’ health.

Turn these cash flow knobs. Collecting receivables faster or getting extended credit from vendors will boost cash. Selling inventory faster and keeping inventory levels lower will also accomplish the same thing. Buying inventory only to sit for months on the shelf waiting for customer orders can take a lot of cash out of the business.

Other ideas to bring more cash into your business are:

  1. Get your customers to pay with credit cards at the time the product or service is delivered. This way, you get money you can use in your checking account the next day.
  2. Give customers discounts for paying their bills sooner. With interest rates low, you can offer a half percent discount for paying within 10 days.
  3. Ask customers to pay a deposit or an advance for services before you perform it. This is a practice in many industries.
  4. Bill your customers as soon as you perform the service or deliver the product. Don’t wait until the end of the month to send them a statement. Billing can happen daily or weekly.
  5. Be diligent about collecting your accounts receivable. State a specific date that the payment is due. Call soon after the bill is sent out to make sure they received it and ask when it will be paid. Follow up early and often. You have a right to be paid within terms, so don’t be timid about asking for your money.
  6. Get 60 or 90 day terms in which to pay your bills. Staying within terms will get your company more credit.
  7. Pay your own vendor bills after 30 days with credit cards. This gives 30 more days to pay until your business credit card bill comes due.
  8. Track your inventory carefully. Know what sells quickly and what never moves off the shelf. Know how long your customer will wait for a product and still be satisfied. Set reorder points and reorder quantities carefully.

What steps do you take to manage your company’s cash flow?

Barry Moltz

Barry Moltz

Contributor at Fundera
With decades of entrepreneurial experience in his own business ventures, Barry has discovered the formula to get stuck business owners out of their funk and marching forward. He has founded and run small businesses with a great deal of success and failure for more than 15 years. He is the author of three small business books.
Barry Moltz