Importance of an Initial Cash Flow

Cash flow when starting a business or investing in a project may mean you need to adopt a different philosophy than if you were handling your own personal family finances.

You may Buy on Terms
For service businesses such as web development companies, or management consultants you may have to make a decision to buy equipment such as computers or printers on terms in order to preserve cash flow over a period of time as you build clientele.

So you may have to pay a bit more in interest charges. However, this can preserve the cash you need to stay afloat and pay fixed costs such as rent.

Now, in your personal life to keep your debts low you may have decided to purchase a home computer or copier with cash you saved up.

You Need to Learn a Sales and Billing Cycle
Budgeting for monthly cash flow means learning how long it takes for you to land your preferred type of client. Then, you need to learn how long it takes for them to pay once your project is finished.

You Need to Adjust Your Project Deadlines
A company I worked for landed a $ 45,000 web site project that required heavy expertise in programming. The original projection was to finish the project in about 3 months. However, client delays and challenges in programming a complicated database stretched the project to six months.

This was a challenge since the last invoice couldn't be collected until the site completely launched. The small staff of employees had to adjust expectations on getting paid since another large client was slow in paying as well.

Should You Pay all Bills on Their Due Date?
As a homeowner, I always pay my bills on or before the due date. However, when running a company I co-owned that was a LLC in the state of California, I put off paying the $ 800 fee for having a LLC.

We were starting several projects at once and while the initial deposits came in, the remaining portions to be collected were going to be spread out over 3 4 months. The charge for paying up to 5 months later was about 10% more. I felt badly but figured that was the best choice to preserve our cash flow. Besides, we wanted to pay ourselves something before we paid the state of California.

A couple of years later, I heard a man who successfully owned a financial services company say that when you're running a business there are some bills that can be put off if cash is needed to cover more important expenses.

Watch Your Accounting
If you do put off certain bills, buy on terms such as 30 days to 90 days then make sure your accounting system flags them and reminds you. If you have extra money in the bank don't spend it until those obligations are met.

Handling your cash flow for business means knowing the following:
*how much money is currently in the bank,
*your monthly expenses and vendor costs,
*how many sales you need to make to stay in business so you can pay yourself.

But putting together all the pieces is a satisfying achievement and will help you develop skills you may not know you had.

Learn more about this author, Don Simkovich.
Click here to send author comments or questions.

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