Cash flow, or the lack thereof, can often be a problem for small, new and growing businesses. In simple terms, cash flow is all about the amount of cash you’ve got coming in and going out, and when.

That being said, a cash flow projection, or cash flow budget, is as critical as a business plan or an income statement. Many questions may arise regarding the frequency, complexity and manner with which a projection is prepared. So, how often do you need to prepare a cash flow projection? The answer is, as often as need be; it could be weekly, monthly, or quarterly, depending on the age, and type of business. For example, seasonal businesses may require more frequent projections.

Obviously, some cash projections will be more complex than others; again, this will depend on the age, and type of business. A cash flow projection can be as simple as creating a spreadsheet, or sophisticated software can be utilized, depending on your needs.

How is a cash flow projection prepared? First, consider the sources of cash (receivables): sales, loan proceeds, investments and the sale of assets, and the uses of cash (payables): operating and direct expenses, principal debt service, and the purchase of assets. Second, nail down, as best you can, when the sources and uses occur. Cash flow – like anything else, requires you to look into the future and make assumptions. These assumptions can, and will change, and should be revisited on a regular basis to ensure their accuracy.

To thoroughly analyze your business in relation to the factors affecting cash flow, keep the questions of who, what, when, where, why, and how in mind. Examining everything in this manner will ensure you leave no stone unturned in creating the most accurate projection possible.

With this in mind, let’s look at the major factors affecting cash flow, and how you can manage each the most effectively.

Accounts Receivable. Who owes you money? How much do they owe you? How many accounts are past due; how far past due are they? How often are you reviewing past due accounts? Are you offering customers discounts so they have an incentive to pay you more quickly? Are you issuing invoices on a timely basis? Are you following up with slow-paying customers in a timely manner? Do you require credit checks for all new customers; are you checking references? Do you extend a small amount of credit initially, thereby forcing customers to ‘prove’ themselves before extending further credit? Have you instituted a C.O.D. policy for slow paying customers? Do seasonal factors affect your business and/or customers, and if so, are you taking this into consideration?

Inventory Management. Do you have too much cash tied up in inventory? Do you have too much inventory, period? Do you have a healthy balance of different types of inventory; lower margin items, slower moving items, versus high profit, fast moving items? Do you have obsolete inventory? Are you actively trying to move the obsolete inventory, for whatever price you can get?

Accounts Payable. Are you paying bills when they’re due, not before? Are you taking advantage of paying bills electronically, so you’re able to pay them on the day they’re due, thereby allowing you to keep control of your  funds as long as possible? Are you taking advantage of the discounts vendors offer for early payment of invoices? Sometimes it’s advantageous to do so; sometimes it’s not. Weigh your options with the other obligations you have. Are you always short of cash at a certain time of the month? Can you readjust payments due so they’re spread out more evenly during the month? Are you getting the best price for the products and services you receive? Can you reduce, or eliminate certain expenses? Again, do seasonal factors affect your business and/or customers, and if so, are you taking this into consideration?

Regardless of how well you plan, there will no doubt be times when you are short of cash. You can take several steps to bridge the gap, but they also require planning. They include having an established line of credit, and factoring accounts receivable – which basically means you can sell receivables today for a percentage of what they’re worth. Other ways you might drum up some cash in a pinch include delaying payments to vendors – after having discussed it with them, of course – and asking customers to pay you more quickly.

Overall, by monitoring sales, receivables and payables, by creating a cash flow projection on a regular basis, by communicating with staff, customers and vendors, and by planning for a rainy day, you should be able to vastly improve cash flow within your business. It’s oft been said that timing is everything, and this is perhaps the most critical factor in relation to cash flow.

 The recent demise of book giant Borders is, while tragic on many fronts, also a seismic shift in the marketplace, and demands that businesses everywhere take a lesson, lest we forget, in the words of Spanish American novelist George Santayana that, “Those who cannot remember the past are condemned to repeat it.” 

According to the July 21^st entrepreneur.com blog, “What Entrepreneurs Can Learn from Borders’ Demise”, there are several factors that contributed to the failure of the chain. 

Size matters. Because Borders stores are so large, they carry large overhead expenses, including rent and utilities. That’s all well and good, given there’s also a large volume of foot traffic – and thus customers – buying books and music. But with the overwhelming trend toward virtual shopping, the volume of customers needed to support said expenses began to disappear. Independent retailers have smaller store fronts, which translates into lower overhead, which translates to more security. 

Lesson learned? Bigger isn’t always better. Even if you’re not a bookseller, the logic still applies. If you’re a business owner with a physical location, think long and hard before you build or rent a bigger office. Do you really need it? Or can you make do with what you’ve got? Could certain employees telecommute? Could you offer more products online? Think outside the ‘big box’ concept. Remember, often less is more. Maybe Borders would have survived, albeit a bit longer, had it adopted a plan to close stores gradually, proactively, instead of being forced into it. 

Work it. Borders had hundreds of square feet of store space, but rarely used it for anything other than book displays. What could they have done with the space? What about hiring bands? Putting on cooking demonstrations? Debates? A coffee klatch? Poetry or book readings? Perhaps this is a case of Borders resting on its laurels – just because it’s Borders doesn’t mean it’s all that. Advertising, reaching out to the community in order to increase foot traffic – and thus customers – didn’t happen, or didn’t happen enough. 

Lesson learned? Plan to invest dollars and resources in advertising on a regular basis. It’s the old adage of, ‘you have to spend money to make money.’ 

That’s so last season. Borders somehow lost touch with the fact that the internet provides a major platform for e-books and virtual shopping. The big box bookseller never managed to develop a dominant online presence. Opinions vary when it comes to the electronic versus paper preference, but one thing is for sure – digital media is here to stay. 

Lesson learned? Stay in touch with trends. It’s not wise to jump on the bandwagon for every trend that comes down the pike, but this one was screaming, jumping up and down, and waving a red flag for at least a decade. Don’t get set in your ways. Invite discussion, and schedule ideation sessions with your employees on a regular basis. Follow the market. Read industry literature. Attend continuing education classes. Network with your peers, and your competition. Be proactive, and keep an open mind.

As for the electronic versus paper debate, that’s a topic for another blog.