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Hello All, According to a study by CB Insights , the number one reason that startups fail is because they “ran out of cash/failed to raise new capital.” While this isn’t surprising to most business owners, it is a good reason to ensure that you do what you can to understand where your cash is coming from, where it is going and how to manage it. As I explain in my blog post this week, many businesses are profitable but have negative cash flow i.e. cash going out is higher than cash coming in. This happens for a variety of reasons, which are mainly due to how sales and expenses are recorded for accounting purposes vs the timing of cash received vs paid. You might have a business that generates significant sales, but your customers only pay you a couple of months after sending them the invoice. Of course, you still have to pay your bills and ensuring that you have the money to do this requires cash flow management. You might be able to defer some expenses or have access to a revolving line of credit with your bank to cover any shortfalls. The best tool that you have for understanding your cash flow is a good accounting system. Accounting software has made it easy to generate cash flow reports which can then be reviewed to see your current situation. Once you have the data from your accounting system, you can prepare a monthly cash flow budget which will let you estimate your inflows and outflows. This helps you to anticipate any surprises and prepare for them in advance. It is also a great exercise to help you strategize for the short and medium term and to implement financial discipline as it relates to your spending. There are various templates available online to help you do this and for those of you that have never done it, it is easier than you think. Having to scramble for cash is never fun and can often be avoided with proper planning and cash flow management.
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