Cash Flow Management and the Small Business

Any company, big or small needs to manage its cash flow well, just as much as its sales and expenditure. There are many giants that were seemingly doing very well with steeply rising sales and running massive projects, spending lavishly on research and development backed with advertising campaigns, only to see them crash almost overnight. What is the reason for such unexpected crashes? Since we are told that their sales were doing well and expanding, then the root cause has to be poor cash flow management. Cash flow is the difference between your receipts and payments (in cash, whether from bank accounts or from other source). Cash Flow should not be confused with income and expenditure or profit and loss that is quite different from receipts and payments.

The company is highly bucked at the prospect of making an almost 350% profit on their new contract. With much fanfare, jubilation and congratulations all round, contracts are signed; product is manufactured and delivered to the customer in January. Being a small company operating within a modest budget, it had to borrow from banks at high interest rates for procurement of raw materials etc for this operation.

Customer is paying only in July, which is six months hence. The small company in its eagerness to grab the deal at all costs, had invested all its resources on this special project, and with monthly high interest payments now due to the lending institutions for the next six months until they get their payment from the super contractor to pay off the banks, and being unable to get any further loans, gradually finds itself unable to meet its normal monthly commitments on rents, rates, salaries and wages etc. or keep the production lines rolling for the manufacture of their normal products and already agreed supplies to other customers, even in more their smaller quantities. So the company inevitably crashes, why?

Simply because they did not bother to see how their cash flow would work out during the interim period between spending and receiving money; by only concentrating on making a massive $ 775,00/- gross profit on a single contract.It would be seen that "over investment" beyond their means led to the above crash. If it had been a bigger company with more assets and resources, it could have got away with it by drawing on their excess resources during the period they had to wait for settlement by the contractor. Thus, it is seen that smaller companies are more vulnerable to cash flow problems than their bigger counterparts. The following tips should be useful to avoid similar disasters by managing your cash flow well.