Cashflow, Profitability, and How You Can Still Go Broke

It’s Thursday afternoon, you’re looking at your business bank account and you don’t have enough money in it to pay your employees tomorrow. There are two things you can be sure of if this is a situation you’re dealing with. The first is that your life is about to get a whole lot worse; and the second is that you haven’t had a good handle on cash flow for a little while.

If you don’t have a solid understanding of cash-flow, you can go here or here. But trust me when I say if you don’t go to the first one, sooner or later you will be going to the second one.

The Importance of Cash Flow
If your company is unable to meet its payroll obligations, or make other payments, there are a few ways you can put your company back on the tracks. They range from borrowing from friends, family, banks … pledging personal or business assets or accounts receivable against a short-term loan, to talking to your employees and asking them if they would mind not having a paycheck while you sharpen up your knife juggling act to make some extra money at the Rennaissance Festival. Nobody said that those conversations would be comfortable, but they’re a lot easier than the conversation that ends with you locking your doors for good.

Joe Knight, co-author of the best-selling book, Financial Intelligence said that many small businesses “do not understand or appreciate the concept of cash flow, that cash flow and profit are different things.” And when it comes to those difficult conversations, “small businesses end up there if they don’t track their cash flow. The reason small businesses fail is not because they’re not profitable, it’s because they’ve run out of cash,” he said.

Generating a cash shortage is easy — just let your expenditure exceed your liquid assets. Sure, you might have a million dollars in sales on the books, but since the payments from your customers aren’t due for another 60 days, you need to be able to stay in business, pay your bills, and keep turning out product until those checks arrive.

Knight cautions business owners that “if you’re a business that sells on credit, which is the majority of small business, and you are growing rapidly, you will run out of cash. It’s inevitable, and it doesn’t matter how big your margins are. You will run out of cash, and if you understand that, if you model that, you can get financing for it. If your business is profitable you can always find financing sources.”

It’s a sentiment echoed by Mitch Jacobs, CEO of On Deck Capital Inc., in New York. “Identify a plan that requires the least amount of start up capital to get to a point where they’re [small business owners] generating cash flow, and then look to their savings, their own friends and family, and local sources of investors that can help them get money in place.”

Sources of Finance
The first source of finance for most small business owners, though, is still likely to be the bank. You might not think you need credit, but having a credit line available to you is just good financial management. Consider it being prepared. Since the start of the Great Recession, a lot of banks have stopped lending, and the ones who are releasing money are making it very difficult for businesses to borrow. But there is still money out there.

Knight told us that “small businesses shouldn’t rule out the possibility of going to a financial institution, and community banks are the way to go, especially in [cash shortage] types of circumstances. Larger banks run everything off ratios, and they’re not going to value the personal side of credit challenges.”

After that, you might consider asset based lending, borrowing against physical assets like real estate and equipment, or even against your accounts receivable.

Wrangling your cash flow is probably the most important thing you can do as a business owner. Failure to do that is the reason many businesses file for bankruptcy under Chapter 11. Knight’s final word on the issue? “Always focus on cash flow, because that’s where you’re going to die.”

Joe Knight is a founding partner of FinanceDog and co-author of Financial Intelligence. He also is co-owner and senior consultant with the Business Literacy Institute. He travels nationally and internationally to teach employees, managers and leaders about the financial side of their business. Clients such as Electronic Arts, MetLife and Visa praise his knowledge, style and sense of humor, with comments from attendees such as, “we will definitely get an ROI from this program,” “the best training course I’ve ever taken” and “everyone in our organization needs to take this class.”

Joe received an MBA from University of California, Berkeley, and bachelor’s degree in economics from Brigham Young University. He has served as a professor at University of Phoenix and Westminster College and is a frequent guest lecturer at Brigham Young University.

Mitch Jacobs is a founder of On Deck Capital Inc., and serves as its Chief Executive Officer. He is one of the leading entrepreneurs in the payment processing industry, having started and sold his two previous payment processing startups to public companies. Mitch has served as Chief Strategy Officer of Comdata Processing Systems. He founded Tranvia Inc. and served as its Chief Executive Officer. He served as Vice President of Product Management of Student Advantage. He joined Student Advantage after their acquisition of his company, Transaction Service Providers Inc.

Mitch serves as Director of On Deck Capital Inc., and holds a Bachelors degree from Dartmouth College.

This entry was posted in finance and tagged , , , , . Bookmark the permalink.