Businesses usually go under for one of the following two reasons: the business is either currently out of capital, or it is going to run out of capital in the very, very near future. As a business owner, making sure you and your company have money (or at least the ability to generate money someday) is the one true essential. Above all else, you must possess the ability to maintain a cash flow to keep the doors open. Everything else is window dressing.
So how do you make sure you always have cash? Be more careful than the next guy. If I was to have a P100 for every over-optimistic and unrealistic cash flow projection I see from startups, I’d be having a lot of money—certainly more than they ever earned.
How to keep from following in their money-less footsteps? Follow these steps to a sound cash flow projection and keep your business afloat.
A rule of thumb I was taught early on in business was, “Pretend like you won’t sell anything the first six months.” Then why do so many businesses go under even quicker than that? Because they had completely unrealistic expectations about what kind of money would be coming in. As a result, they were playing with money they didn’t have yet and likewise couldn’t be sure they would get.
So how do you get through such a situation? Assume the worst and hope for the best. Assume everyone in the world will avoid your business like the plague, at least initially. Or just assume sales might dip severely for no apparent reason.
Budget for the Unexpected
While budgeting for bad times is generally good management, budgeting for catastrophe is even more important. What I’m talking about here are the big hits.
Natural disaster funds are not an optional expense. You need to set aside a large chunk (a couple-few months operating budget) so you can weather an unforeseen catastrophe. Otherwise, you’re always one virile bedbug away from shutting your doors. While building this set aside can be painful, especially if you’re barely on your feet to begin with, being without reserves is not an option.
Follow the Economy at Large; No business is an Island
Yes, we know, the economy of the world is looking bad right now, really bad. But even though we are in a valley right now, the week-to-week, month-to-month, quarter-to-quarter blips are essential to follow. Consumer spending really does change quickly and you as a business owner can stay up on it if you pay attention. You can study harder than the next guy, anticipating how and when your customers will spend. Or what kinds of goods and services they are currently seeking. But to do so, you need to stay informed. And temper your projections in line with what is happening in the world around you.
4. Consult Professionals
But most importantly, you don’t need to do this yourself. When making realistic cash flow projections Get help from a professional (unless you’re an accountant, and even then…it almost never hurts to get another opinion.) And when I say professional, I don’t mean enlisting a family member to manage your finances. I mean an honest-to-goodness real life impartial arbiter, someone who won’t be afraid to call you a loon when you projections are way unrealistic.
A good accountant is like your business’ mechanic: he or she can take one look at your books and tell you what needs to be tweaked, repaired or just flat out scrapped. Because while you might be a special snowflake who makes the best business decisions in the world, you can never underestimate the importance of fresh, well-trained eyes on your cash flow projections.