Bob Gauvreau explains why small businesses run out of cash even when they're profitable. Delayed customer payments and overstocked inventory drain operating funds, and buying equipment with cash meant for daily operations leaves you exposed when emergencies hit.
Chapters
Foreign. Let's talk about the top challenges that small businesses face. Let's start with cash flow management. Cash flow management is essentially the process of money coming in and money going out. The first thing we need to understand is that the major driver of cash flow in is profitability. This comes from looking at our income statement or selling items at a higher price than what we're actually paying to have them delivered. This brings in positive cash flow. Now, what you might say is, well, Bob, it doesn't. And you're right, it means that we're selling something, we're collecting the money for it, and then we're paying our expenses. Because if we're not collecting money, our cash flow management is out the window. So that would be one of the biggest cash flow management challenges in a small business, is not collecting money at the time we deliver it or upfront and allowing people to pay us after we deliver it. That would be a negative cash flow, even though we've made profit. The other challenge on a cash flow management side is managing inventory. If inventory continues to go up and we're managing and we're investing our working capital or our business cash in increasing inventory, our cash flow resources are going out the window. We need to be paying attention to that. Another area is on acquiring assets. If we're using our business cash flow to buy assets for our business, we're likely missing a huge opportunity to let the bank invest that for us. When we're buying our capital assets from our cash flow in our business, it puts our business in a really vulnerable spot because we're using all of the cash to pay for assets. If something happens in the short term, then we could potentially be in a cash flow crisis because we've used all our cash to pay for assets. Not a good spot in our business. Those are going to be the major components of cash flow management. If you get those right, your business will be in a very strong position.
