Cash Flow: The Daily Stresses of Small Business Financial Management

I’ve often said that running a business requires juggling a lot of hats, many out of your field of expertise. Most small business owners have to broaden their scope and deal with sales, marketing, business planning and figure out how to handle employees and clients, all of which have their own unique and individual challenges. But there is one part of small business management that seems particularly challenging: small business financial management and in particular, juggling cash flow.

An interesting post in the “You’re The Boss” blog tells us the story of a day in the life of Paul Downs, a furniture manufacturer who is trying to figure out how to manage his cash flow and cover over $22k worth of bills with only a couple of hundred bucks in the bank. As a business coach and consultant who plied my trade “in the trenches” through running my own companies, I can see that Paul’s situation is real, and see this kind of thing happening to many small businesses every single day.

Paul writes:

“9 a.m.: Monday greets me with a stack of overdue bills on my desk totaling $7,926.82. I have to pay our health insurance bill this week: $7,239.49. I have budgeted $4,500 for a week’s worth of materials, $2,000 for our AdWords campaign, and $1,000 for freight. That’s a total of $22,666.31 heading out the door.

My bank balance: $355…”

Paul’s plight reminds me of what it was like to run a sweater design and manufacturing company 20 or more years ago. With retailers paying 90 days out, and contractors who had to be paid within 7 days of completing goods, it was hard to maintain enough working capital to cover the gap. For several years it seemed like I spent the entire week trying to accumulate enough money to cover that week’s expenses, which in our business came due on Fridays.

It would start Monday morning. I knew what our payroll was, and knew when our yarn bills were due. The yarn bills were factored and we worked very hard with the banks to extend us enough credit to be able to fill our orders, and extend us the same 90 day terms that the retailers took to pay their bills. Of course, this dating didn’t coincide, since yarn was only the first step of a complicated process, so invoices for yarn, knitting, dying, trimming and the sewing of sweaters were often due before the goods were shipped.

Aside from the contracting labor, yarn bills and payroll were our first priority. We maintained detailed spreadsheets to track production and cash flow. At the beginning of the season, things often looked good on paper, but then all of a sudden there would be a wrinkle. A buyer would want to delay shipment. A retail chain would file Chapter 11, a contractor would have labor problems. All of a sudden, that beautifully engineered cash flow spreadsheet would have to be reworked, and money that was supposed to be there, would disappear. Somehow we’d make it to Friday, and then it would start all over again, until we built up enough capital to give us more cushioning.

Small business financial management can be complicated. You need effective cash flow management, you must understand how to stretch working capital, implement expert quality control, cost negotiation and continually work on cost cutting and efficiencies. But in order to do any of this, you must first become expert at small business financial management and know exactly where your money is, and where it’s going at all times. I’ll cover more of these issues in detail in future posts.

Susan Martin, Small Business Financial Management