Cash Flow: Timing Matters

Remember living paycheck to paycheck? You pay off everything and have just enough left for food and gas, then you must count the days until the paycheck comes in and the vicious cycle repeats. A millionaire could find himself in this situation. You can have lots of cash coming in, but yet somehow end up with only a few bucks in your account.

The important thing is to understand the difference between cash and profit. On paper, a business can show a profit. Yet, it doesn't have enough money on hand because of ... cash flow ... the money the business is waiting on.

This Current-Argus article explains the importance of timing in managing business cash flow. From the article:

While it is important to budget for sales, it is critical to budget for cash collections when you will be paid for the goods and services you provide. Equally important is to budget for cash payments when your vendors or suppliers are required to be paid. Timing is the key: unless you operate a cash-only business, sales do not equal cash collections, and expenses do not equal cash payments. Many businesses extend credit and, thus, are paid sometime after the sale is made. Likewise, many businesses pay vendors after the goods or services have been received.

Let's say you land a contract for $1 million. You're not likely to see any of that money until you start working first. If you provide a service, then your employees will need to start servicing. They don't care about the $1 million your company has coming. They just expect to receive their salary on time.

SCORE has a free 12-month cash flow Excel spreadsheet available for downloading. The site also has a short guide on managing cash flow and recommends paying yourself first.

Experts recommend charging a late payment fee whenever clients don't pay within 30 or 60 days, or offering a discount for those who pay on time. Some businesses can ask for upfront payment or a retainer payment.

If you're using accounting software like QuickBooks, use them to generate cash flow statements instead of relying on the income profit-and-loss statement. Profit and loss statements don't show the cash available. A balance sheet, on the other hand, looks at what the company has deposited and paid -- it tells the true story of where the company stands today in terms of cash in hand.