Cash Flow Management

Many entrepreneurs and small business owners have great business ideas and this is reflected in their products and services. These great business ideas are mostly sound but lack one very important element of good business strategy — Cash Flow. Many businesses fail not because their ideas are flawed but they just could not maintain their Cash Flow well.

Cash flow management is a problem for almost any firm, large or small. The worst symptom of the problem: the business runs out of cash. Watching a business floundering, running out of cash even as it makes great sales and profits is painful. Painful though it may be, it is common and repeatedly the cause of business failure.

Small businesses are especially vulnerable to cash flow problems since they frequently operate with inadequate cash reserves or none at all and, worse, tend to miss the implications of a negative cash flow until it's too late.

Any good business plan must provide you with a reasonable forecast or estimation of the breakeven point. Even it may take time before breakeven point can be met you should at least ensure that you have available cash on hand to sustain the business throughout its life. Cash Flow must be maintained at a comfortable level at all times. By comfortable, I mean it should be at least more than 2 to 3 months of your total expenses and sales costs.

For financing purposes, cash flow projections are generally the most crucial aspect of the business plan. Bankers and other outside financing intermediaries will almost always look for a cash flow analysis in preference to any other financial statement, because this will show how the loan can be repaid. In larger companies, the cash budget for a new project or expansion is critical to the overall decision to commit funds and move forward.

Timing and cash flow are inseparable. Payments to suppliers are typically expected often even before customers of the business pay their bills. As a result, the operation is very likely to have a negative cash flow when it grows dramatically. Periods of change are always reflected in an altered cash flow. If sales fall off, the cash flow slows down. Interestingly enough even if sales increase, the cash flow may stop completely or even become negative (more out than in). Think of the impact of credit sales on cash flow, for example. One-time events such as population shifts or changes in competition could trigger such consequences. More commonly, seasonal fluctuations of the business may also pose cash flow problems where a build-up of inventories must precede the sales cycle (such as a toy business prior to the Christmas holidays).

Whatever the cause, the underlying message is simple: Run out of cash and the business is in trouble. Even if it is possible to raise more money from other sources, sooner or later the timing of cash inflows must match the outflows if the business is to survive.

Why is cash flow so important? If the cash inflows exceed the cash outflows, the business can continue operations. If the cash outflows exceed the inflows, the business RUNS OUT OF CASH and grinds to a halt. Even if the imbalance is only for a short period, it can spell disaster.

Cash flow management does not need to be mysterious or complex. Managing cash is all about timing the inflows and outflows. Cash Flow Analysis starts the process. This can be as simple as going to your check book or accounting system and analyzing your receipts and disbursements over the past few months. A pattern is likely to emerge. What are the revenue sources, and how consistent are they from month to month? As well, what are the expenditures, and how repeatable are they from month to month? Next, look at the incoming revenue stream (Accounts Receivable) or your sales forecast to confirm and further predict cash inflows, and your Accounts Payables to build a pattern of required future disbursements. Match the two. Is there a positive or negative cash flow?

If there is a negative cash flow, the deficit needs to be covered from somewhere. There are two options. Spend less, or get more revenues. Even it the cash flow is positive, inspecting the individual elements may further improve operations. Are there cash inflows or outflows that can be changed?

Cash inflows can be increased by adding new outside cash (usually a limited or one-time option) or, more commonly, by offering a discount for cash payments or for accelerated payments on regular accounts receivable (so-called "quick pays"). Another option for businesses normally offering open account credit (which become the Accounts Receivable), is to offer credit cards instead. Today, even many corporate customers, including many agencies of the federal government, utilize credit cards for purchases to eliminate much internal paper work for themselves.

Cash outflows can often be reduced and/or delayed. They can be reduced by eliminating certain costs (Do you really need a …?) They can frequently be delayed by negotiating or taking longer payment times than you have observed in the past. Many smaller businesses pay their monthly bills (their Accounts Payable) more quickly than they need to in an effort to maintain a good credit rating. The primary criterion here, however, is not necessarily how quickly you pay, but the consistency with which you pay. If you are inclined to pay bills at the end of the month in which they were received, instead, establish a policy to pay 30 or 40 days after receipt. You will automatically gain the equivalent of one to three weeks spending as a one-time improvement in your cash balances, and may be better able to align outflows (expenditures) with inflows (receipts).

If you are coming from a finance background, this is definitely nothing new to you but if you are not, then here are some simple steps that you can take in order to start managing your Cash Flow with your business plan:

1. Set a period of 24 months as your scope of planning. If you can not breakeven within 24 months, I would recommend you to really reconsider whether you want to proceed with the business idea.
   
   
2. Forecast your monthly regular expenses with enough headroom for all unforeseeable items. You may just include an item called “Miscellaneous” if you do not have a clue for the time being.
   
   
3. Forecast your monthly sales with a progressive growth rate. You need to be extremely conservative in order to ensure you are not over promising yourself the sales revenue before you have real data to support these forecasts. You can always revise it up and evaluate when the plan seems to be working or after running the business for a period of time. One thing to note is that even you have sales orders in each month; you may only receive payment after 30 days (or more) depending on credit terms you give to your customers. Accounts Payables always tests a company’s finances.
   
   
4. Forecast your monthly sales cost in relation to the forecast sales. You have to bear in mind that sometimes higher sales volume means you have to increase labor; so labor costs or salaries have to rise proportionately.
   
   
5. Calculate monthly profit (or loss) by totaling up sales and subtract expenses and sales costs. You will instantly see on which month you start making profits. The initial months will mostly be negative figures (i.e. losses) until total sales are higher than the sum of expenses and sales costs (including cost of goods).

After doing the above steps, you now can probably answer the most important question before you start any new business. That is, how much cash or capital should you invest in order keeping your business running until profit starts to build up? It is a relatively simple calculation as you just need to add all your losses in the initial months together plus two to three months of regular expenses (and sales costs) to make up the total capital required for your new business investment.

For example, you estimate it will take eight months before you can make a profit from your new business and the total loss is Rs. 700,000 during this period. You also calculate your monthly expenses and sales costs to total Rs. 100,000. Then your minimum cash required to invest at the beginning should be no less than Rs. 700,000 + (Rs. 100,000 x 3) or Rs. 1,000,000.

It may sound very simple but as others will tell you, business is very dynamic and no two companies will experience exactly the same conditions. What is certain though is that dynamics of the market are the same and so be prepared for uncertainties. Still, it is extremely useful to do such exercise in order to have a quick reality check of your business idea. This is the very reason why I did not start up my business early in the process as I could not shorten the loss period to minimize my investment risk!

Understand what your own cash flow cycle is. This process will take time and thought - otherwise it won't work. It is essential to take time to experiment with combinations of different alternatives. A controlled cash flow, the end result of this process, will more than repay the time and effort given to it. In fact, it may save the life of the business - and the future of the owner/managers as well.

Run your business - don't let it run you. This is COMMON SENSE.

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The First 90 Days of an Entrepreneur

Ever wondered what being an entrepreneur is like? Go to this blog post at Yu-Kai Chou to see the "The First 90 Days of an Entrepreneur". It has a really funny video and some great tips on how to start your venture.

Excerpts from the post:

In most people’s minds, the hardest part about being an entrepreneur is starting. That’s actually not true. Starting is the easiest part and it just requires you to get off your butt and start doing things. You only think it’s the hardest part because that’s the part YOU are stuck on.

For that reason, here’s a little guide to help you get over that “but I don’t know how to start!” hurdle, so you will have no excuse not knowing how to start your company.

25 Common Characteristics of Successful Entrepreneurs

Regardless of your definition of success, there are, oddly enough, a great number of common characteristics that are shared by successful businesspeople. You can place a check beside each characteristic that you feel that you possess. This way, you can see how you stack up. Even if you don't have all of these characteristics, don't fret. Most can be learned with practice and by developing a winning attitude, especially if you set goals and apply yourself, through strategic planning, to reach those goals in incremental and measurable stages.

Business Musts

Like any activity you pursue, there are certain musts that are required to be successful in a chosen activity. To legally operate a vehicle on public roadways, one must have a driver's license; to excel in sports, one must train and practice; to retire comfortably, one must become an informed investor and actively invest for retirement. If your goal is success in business, then the formula is no different. There are certain musts that have to be fully developed, implemented and managed for your business to succeed. There are many business musts, but this article contains I believe to be some of the more important musts that are required to start, operate and grow a profitable business.

1. Do what you enjoy.

What you get out of your business in the form of personal satisfaction, financial gain, stability and enjoyment will be the sum of what you put into your business. So if you don't enjoy what you're doing, in all likelihood it's safe to assume that will be reflected in the success of your business--or subsequent lack of success. In fact, if you don't enjoy what you're doing, chances are you won't succeed.

2. Take what you do seriously.

You cannot expect to be effective and successful in business unless you truly believe in your business and in the goods and services that you sell. Far too many home business owners fail to take their own businesses seriously enough, getting easily sidetracked and not staying motivated and keeping their noses to the grindstone. They also fall prey to naysayers who don't take them seriously.

3. Plan everything.

Planning every aspect of your business is not only a must, but also builds habits that every business owner should develop, implement, and maintain. The act of business planning is so important because it requires you to analyze each business situation, research and compile data, and make conclusions based mainly on the facts as revealed through the research. Business planning also serves a second function, which is having your goals and how you will achieve them, on paper. You can use the plan that you create both as map to take you from point A to Z and as a yardstick to measure the success of each individual plan or segment within the plan.

4. Manage money wisely.

The lifeblood of any business enterprise is cash flow. You need it to buy inventory, pay for services, promote and market your business, repair and replace tools and equipment, and pay yourself so that you can continue to work. Therefore, all business owners must become wise money managers to ensure that the cash keeps flowing and the bills get paid. There are two aspects to wise money management.

1. The money you receive from clients in exchange for your goods and services you provide (income)
   
   
2. The money you spend on inventory, supplies, wages and other items required to keep your business operating. (expenses)
   

5. Ask for the sale.

An entrepreneur must always remember that marketing, advertising, or promotional activities are completely worthless, regardless of how clever, expensive, or perfectly targeted they are, unless one simple thing is accomplished--ask for the sale. This is not to say that being a great salesperson, advertising copy writing whiz or a public relations specialist isn't a tremendous asset to your business. However, all of these skills will be for naught if you do not actively ask people to buy what you are selling.

6. Remember it's all about the customer.

Your business is not about the products or services that you sell. Your business is not about the prices that you charge for your goods and services. Your business is not about your competition and how to beat them. Your business is all about your customers, or clients, period. After all, your customers are the people that will ultimately decide if your business goes boom or bust. Everything you do in business must be customer focused, including your policies, warranties, payment options, operating hours, presentations, advertising and promotional campaigns and website. In addition, you must know who your customers are inside out and upside down.

7. Become a shameless self-promoter (without becoming obnoxious).

One of the greatest myths about personal or business success is that eventually your business, personal abilities, products or services will get discovered and be embraced by the masses that will beat a path to your door to buy what you are selling. But how can this happen if no one knows who you are, what you sell and why they should be buying?

Self-promotion is one of the most beneficial, yet most underutilized, marketing tools that the majority of business owners have at their immediate disposal.

8. Project a positive image.

You have but a passing moment to make a positive and memorable impression on people with whom you intend to do business. Business owners must go out of their way and make a conscious effort to always project the most professional business image possible. The majority of business owners do not have the advantage of elaborate offices or elegant storefronts and showrooms to wow prospects and impress customers. Instead, they must rely on imagination, creativity and attention to the smallest detail when creating and maintaining a professional image for their business.

9. Get to know your customers.

One of the biggest features and often the most significant competitive edge the entrepreneur has over the larger competitors is the he can offer personalized attention. Call it high-tech backlash if you will, but customers are sick and tired of hearing that their information is somewhere in the computer and must be retrieved, or told to push a dozen digits to finally get to the right department only to end up with voice mail--from which they never receive a return phone call.

The business owner can actually answer phone calls, get to know customers, provide personal attention and win over repeat business by doing so. It's a researched fact that most business (80 percent) will come from repeat customers rather than new customers. Therefore, along with trying to draw newcomers, the more you can do to woo your regular customers, the better off you will be in the long run and personalized attention is very much appreciated and remembered in the modern high tech world.

10. Level the playing field with technology.

You should avoid getting overly caught up in the high-tech world, but you should also know how to take advantage of using it. One of the most amazing aspects of the internet is that a one or two person business operating from a basement can have a superior website to a $50 million company, and nobody knows the difference. Make sure you're keeping up with the high-tech world as it suits your needs.. The best technology is that which helps you, not that which impresses your neighbors.

11. Build a top-notch business team.

No one person can build a successful business alone. It's a task that requires a team that is as committed as you to the business and its success. Your business team may include family members, friends, suppliers, business alliances, employees, sub-contractors, industry and business associations, local government and the community. Of course the most important team members will be your customers or clients. Any or all may have a say in how your business will function and a stake in your business future.

12. Become known as an expert.

When you have a problem that needs to be solved, do you seek just anyone's advice or do you seek an expert in the field to help solve your particular problem? Obviously, you want the most accurate information and assistance that you can get. You naturally seek an expert to help solve your problem. You call a plumber when the hot water tank leaks, a real estate agent when it's time to sell your home or a dentist when you have a toothache. Therefore, it only stands to reason that the more you become known for your expertise in your business, the more people will seek you out to tap into your expertise, creating more selling and referral opportunities. In effect, becoming known as an expert is another style of prospecting for new business, just in reverse. Instead of finding new and qualified people to sell to, these people seek you out for your expertise.

13. Create a competitive advantage.

A business must have a clearly defined unique selling proposition. This is nothing more than a fancy way of asking the vital question, "Why will people choose to do business with you or purchase your product or service instead of doing business with a competitor and buying his product or service?" In other words, what one aspect or combination of aspects is going to separate your business from your competition? Will it be better service, a longer warranty, better selection, longer business hours, more flexible payment options, lowest price, personalized service, better customer service, better return and exchange policies or a combination of several of these?

14. Invest in yourself.

Top entrepreneurs buy and read business and marketing books, magazines, reports, journals, newsletters, websites and industry publications, knowing that these resources will improve their understanding of business and marketing functions and skills. They join business associations and clubs, and they network with other skilled business people to learn their secrets of success and help define their own goals and objectives. Top entrepreneurs attend business and marketing seminars, workshops and training courses, even if they have already mastered the subject matter of the event. They do this because they know that education is an ongoing process. There are usually ways to do things better, in less time, with less effort. In short, top entrepreneurs never stop investing in the most powerful, effective and best business and marketing tool at their immediate disposal--themselves.

15. Be accessible.

We're living in a time when we all expect our fast food lunch at the drive-thru window to be ready in mere minutes, our dry cleaning to be ready for pick-up on the same day, our money to be available at the cash machine and our pizza delivered in 30 minutes or it's free. You see the pattern developing--you must make it as easy as you can for people to do business with you, regardless of the business you operate.

You must remain cognizant of the fact that few people will work hard, go out of their way, or be inconvenienced just for the privilege of giving you their hard-earned money. The shoe is always on the other foot. Making it easy for people to do business with you means that you must be accessible and knowledgeable about your products and services. You must be able to provide customers with what they want, when they want it.

16. Build a rock-solid reputation.

A good reputation is unquestionably one of the business owner's most tangible and marketable assets. You can't simply buy a good reputation; it's something that you earn by honoring your promises. If you promise to have the merchandise in the customer's hands by Wednesday, you have no excuse not to have it there. If you offer to repair something, you need to make good on your offer. Consistency in what you offer is the other key factor. If you cannot come through with the same level of service (and products) for clients on a regular basis, they have no reason to trust you . . . and without trust, you won't have a good reputation.

17. Sell benefits.

Pushing product features is for inexperienced or wannabe entrepreneurs. Selling the benefits associated with owning and using the products and services you carry is what sales professionals worldwide focus on to create buying excitement and to sell, sell more, and sell more frequently to their customers. Your advertising, sales presentations, printed marketing materials, product packaging, website, newsletters, trade show exhibit and signage are vital. Every time and every medium used to communicate with your target audience must always be selling the benefits associated with owning your product or using your service.

18. Get involved.

Always go out of your way to get involved in the community that supports your business. You can do this in many ways, such as pitching in to help local charities or the food bank, becoming involved in organizing community events, and getting involved in local politics. You can join associations and clubs that concentrate on programs and policies designed to improve the local community. It's a fact that people like to do business with people they know, like and respect, and with people who do things to help them as members of the community.

19. Grab attention.

Small-business owners cannot waste time, money and energy on promotional activities aimed at building awareness solely through long-term, repeated exposure. If you do, chances are you will go broke long before this goal is accomplished. Instead, every promotional activity you engage in, must put money back in your pocket so that you can continue to grab more attention and grow your business.

20. Master the art of negotiations.

The ability to negotiate effectively is unquestionably a skill that every business owner must make every effort to master. It's perhaps second in importance only to asking for the sale in terms of business musts. In business, negotiation skills are used daily. Always remember that mastering the art of negotiation means that your skills are so finely tuned that you can always orchestrate a win-win situation. These win-win arrangements mean that everyone involved feels they have won, which is really the basis for building long-term and profitable business relationships.

21. Design Your workspace for success.

Carefully plan and design your office workspace to ensure maximum personal performance and productivity and, if necessary, to project professionalism for visiting clients.

22. Get and stay organized.

The key to staying organized is not about which type of file you have or whether you keep a stack or two of papers on your desk, but it's about managing your business. It's about having systems in place to do things. Therefore, you wan to establish a routine by which you can accomplish as much as possible in a given workday, whether that's three hours for a part-time business or seven or nine hours as a full-timer. In fact, you should develop systems and routines for just about every single business activity. Small things such as creating a to-do list at the end of each business day, or for the week, will help keep you on top of important tasks to tackle. Creating a single calendar to work from, not multiple sets for individual tasks or jobs, will also ensure that jobs are completed on schedule and appointments kept. Incorporating family and personal activities into your work calendar is also critical so that you work and plan from a single calendar.

23. Take time off.

The temptation to work around the clock is very real for some business owners. After all, you don't have a manager telling you it's time to go home because they can't afford the overtime pay. Every person must take time to establish a regular work schedule that includes time to stretch your legs and take lunch breaks, plus some days off and scheduled vacations. Create the schedule as soon as you have made the commitment to start a business. Of course, your schedule will have to be flexible. You should, therefore, not fill every possible hour in the day. Give yourself a backup hour or two. All work and no play makes you burn out very fast and grumpy customer service is not what people want.

24. Limit the number of hats you wear.

It's difficult for most business owners not to take a hands-on approach. They try to do as much as possible and tackle as many tasks as possible in their business. The ability to multitask, in fact, is a common trait shared by successful entrepreneurs. However, once in a while you have to stand back and look beyond today to determine what's in the best interest of your business and yourself over the long run. Most highly successful entrepreneurs will tell you that from the time they started out, they knew what they were good at and what tasks to delegate to others.

25. Follow-up constantly.

Constant contact, follow-up, and follow-through with customers, prospects, and business alliances should be the mantra of every business owner, new or established. Constant and consistent follow-up enables you to turn prospects into customers, increase the value of each sale and buying frequency from existing customers, and build stronger business relationships with suppliers and your core business team. Follow-up is especially important with your existing customer base, as the real work begins after the sale. It's easy to sell one product or service, but it takes work to retain customers and keep them coming back.

How Do You Find Your Passion and How Do You Pursue It?

Instead of thinking about the passion, expalins Komisar, free yourself to think of a portfolio of passions. Marry this portfolio with the opportunities in front of you, he says. Think of it as a quest towards which you are moving in the right direction, he adds.