by Elton Gahr

Created on: March 15, 2011   Last Updated: March 19, 2011

Cash flow is the primary point of any business and, during difficult economic times, it becomes even more vital that small businesses focus on improving cash flow to discover those problem areas that can make the difference between a small business becoming successful and one that disappears.  In order for these changes to be successful anyone running a small business must learn to balance both ends of the cash flow issue.  Spend too much and you’ll run out of capital before sales catch up, spend too little and you’ll stunt business growth.

The first step is to know the costs and revenue as completely as possible. Virtually every business already does this, but it often becomes too abstract. There are a number of reasons for this. Too big of a time period can be an issue. It is too easy to ignore a quarterly or even monthly budget. It also makes those smaller numbers, which are vital to small businesses, less important.  Twenty dollars may not seem like much in a monthly budget, but for a daily budget of a small business those small expenses are vital.  At this time it is also useful to make a list of those costs that you can affect. Rent for example is more or less uncontrollable, but the payroll can be controlled to some extent. This helps focus cost control and makes it easier to find cash flow problems.

Next in identifying cash flow problems may seem counter intuitive, but it is important to consider those areas where you may be under spending.  New businesses almost always have to grow in order to become viable. This growth is dependent on many factors including advertising, customer satisfaction and other factors which often require money to achieve. Advertisement is often easy to see as a value, but having an extra employee to keep lines short may also be worthwhile. Even having employees who are simply talking to customers can be valuable long term because a regular customer is worth considerably more than the hourly wage of an employee.

For many businesses the time between sale and payment can also be difficult to keep track of. In many cases both the money you owe and the money owed to you has a significant time delay. Most businesses will wait thirty days after receiving a product to pay for it.  If a small business is not aware of this it can lead to significant short term cash flow problems due to simple lack of a reserve between the time product is sold and the time it is paid for.

Perhaps the most important expense of many small businesses is debt. Debt is one of the biggest killers of all businesses and it can be a huge drain on small businesses. Credit is often necessary for small businesses but remember that every dollar borrowed is not only going to cost more than a dollar to repay but is going to make the monthly budget far more difficult to meet.   On the other hand spending surplus to reduce debt can reduce long term negative cash flow considerably.

During a recession cash flow problems and tight budgets are a fact for most businesses, but the good news is that for those businesses which learn to control their budgets will be far stronger when the economy does eventually make an upturn because even a neutral cash flow during a recession should be able to earn considerable profit when sales improve .

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