You would be shocked and amazed at the number of businesses that fail because the owner did not see a cash flow problem in time to do something about it.
One thing I want to help you to see is that a cash flow problem can almost always be seen far in advance – far enough in advance to do something about it.
It is a myth (I’m trying to put this as politely as possible) to think that cash flow problems “just happen”. Rarely is a cash flow problem a sudden event. It is almost always something that accumulates over a period of time.
And it is not difficult to see it coming.
Joe Frazier, the famous boxer, said this: “The punch that knocks you out is the one you didn’t see”.
What Joe Frazier was saying is that in boxing, if you see the punch coming, you have a chance to react. You have a chance to get out of the way. You have a chance to at least “roll with the punch”.
It’s when you don’t see the punch coming that you get knocked out.
In business, if you don’t see a cash flow problem coming, then you don’t see it until the problem has arrived on your doorstep. Most people don’t have a good view into what their cash balance is going to be so the problem smacks them on the side of the head without warning.
That’s how businesses are ruined.
Even if you believe you will have a cash shortage in the future, you still must see it – in advance. You must see it clearly for what it is, how much it might be, and precisely when it is likely to happen.
Then you can plan in advance exactly what you need to do to head off the punch before it lands on the side of your head.
You can’t have the punch show up at the last minute, when you didn’t see it coming. This kind of surprise blow will knock you out. It could be the kind of blow that ruins your business.
THE ALL-IMPORTANT CASH FLOW QUESTION
The most important single step you can take to head off a possible cash flow surprise is to ask and answer this very simple question:
What do I expect my cash balance to be six months from now?
Answering this question will force you to “focus forward”. It will force you to look at your business in a new and revealing way.
It will pull you out of the past and into the future.
The key to answering this question is having a monthly cash flow projection for your business for at least the next six months. A schedule that shows your projected revenues and expenses in the context of your beginning and ending cash balance for each month.
I can’t stress enough how critical this is to really taking control of your business… and your cash flow. It’s hard to overstate just how important this is to everything you do in your business.
YOUR FINANCIAL STATEMENTS ARE NOT THE ANSWER
A cash flow projection is very different than the basic financial statements you use to manage your business each month.
The standard financial statements that all businesses use are not adequate for answering this question. Financial statements are always historical, meaning they’re always presenting what happened in the past.
They are a bit like the rear view mirror in your automobile. The rear view mirror is very helpful when you need to see what is behind you. However, when you are driving down the highway, your focus needs to be on what’s in front of you.
An occasional glance in the rear view mirror is all that’s required.
You have to have a good clear view of what’s ahead of you in order to get where you are going safely. Look in the rear view mirror for too long and you will soon be crashing into something in front of you.
Cash flow projections provide the visibility you need to avoid cash flow problems.
CREATING PEACE OF MIND
Remember, cash flow problems don’t “just happen”. They can almost always be seen long before they ever happen. Your job is to know what you expect the cash balance to be six months from now. That way you’re in control of your business and your cash flow.
Use cash flow projections to make sure a cash flow problem never catches you by surprise. They will provide you the peace of mind that comes from knowing you have your cash flow under control.
You CANNOT run your business successfully without them.
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Philip Campbell is a CPA and the author of the book:
“NEVER RUN OUT OF CASH, The 10 Cash Flow Rules You Can’t
Afford to Ignore”. Philip has helped hundreds of business
owners take control of their cash flow.
—>>> Get your Free Special Report “The Secret to
Understanding, Managing, and Projecting Your Cash Flow”
at http://www.neverrunoutofcash.com.
