Cash is king

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One of the things a small business owner must do is keep a close eye on the monthly Profit and Loss statement.  No later than the 10th of each month it is vital to have the P&L statement for the previous month so you can know exactly what is happening in your business.  But, it doesn't matter how profitable a small business is if it runs out of operating cash. 

Your employees want a paycheck.  Your vendors expect to be paid in a timely manner.  You have numerous fixed costs that require money on a regular basis.    You have operating costs that require cash on hand.  You simply cannot afford to run out of cash.

What can a small business owner do to ensure his or her company will have sufficient cash to operate?  The first thing is to have money set aside for operating expenses.  In our business we found it was much less stressful when we knew we had several months of operating expenses in savings that we could tap into during slower periods.  Identify how much you will need for three to six months of operating expenses and begin to set that money aside in a savings account that you will not touch for any other reason.

The second thing small businesses must do is watch their accounts receivable.  Ideally, you will have no money out on A/R, but many service companies continue to bill their customers rather than require payment at the time of service.  I would suggest doing that only in rare circumstances and only for your best customers.  Everyone else would need to pay at the time of service. 

For those who are being billed, invoices should be sent out immediately.  Another statement should be sent after 30 days, and five days later they should receive a phone call from the owner if they still haven't paid their bill.  At 60 days they probably should be turned over to collections because if they go to 90 days chances are you'll never see their money.  Small business owners must be aggressive in collecting past due bills.  This is your money.  You need this money to pay your employees, your vendors, and your other bills.   Without cash your business cannot operate.

The third thing a small business owner needs to do is to have a line of credit available to help cover expenses during slow times.  This may not be needed if you've created sufficient cash reserves to cover these times yourself, but it might provide you with a little extra assurance, especially if you have just started creating a cash reserve.  The time to request a line of credit is when you don't need it, because if you wait until you need one it's likely you may find you can't get it.

You will find more information about the importance of cash and ways to ensure you have sufficient cash to operate in my book Mistakes: Avoiding the Wrong Decisions that Will Close Your Small Business.