Entrepreneur Beginners Guide “Avoid Negative Cash Flow” Quick and complete Guide to Entrepreneurship for Beginners to Starting and Running a Business

 Entrepreneur Beginners Guide

“Avoid Negative Cash Flow”

 

To become successful you must learn how to manage cash flow. —Robert T. Kiyosaki, author, Rich Dad, Poor Dad

I had no idea when I entered the media business that it was, as my mentor put it, “the easiest business to get into, but the hardest to stay in.” After a few months into my venture, I learned the hard way exactly what he meant.

My challenge was cash flow. So many start-up businesses struggle with understanding and managing cash flow, which is simply a measure of a company’s financial health. It equals cash receipts minus cash payments over a given period of time. Bad cash flow management is one of the main reasons start-ups go out of business in their first year, even if they are profitable. How does this happen? First let’s look at an example dealing with personal expenses.

Many people manage cash flow every month as they struggle to pay bills and hope that they have money left over to save, buy a new car, or go on a nice vacation. If you have a job, you may know the feeling of having lots_ of bills that are due and anticipating payment from your employer so that you can pay those bills. At that moment in time, when you have bills due that same day and a payday two weeks away, you have a negative cash flow position. The reverse situation, when you have more money available than bills due that same day, is a positive cash flow position.

Businesses also struggle with managing cash flow. During the first year of publishing my magazine, enough advertising was sold to cover costs. We encouraged and incentivized prepayment for advertisements so that we could use that money to pay for printing, distribution, and other costs, but not all buyers were able to pay upfront. We extended some customers credit, giving them thirty days to pay us in full. When it was time to pay for our operating expenses, we had barely enough money to do so. Those customers to whom we extended credit normally paid in ninety days instead of thirty. We were profitable on paper, but could never quite get ahead of money going out the door to sustain operations. I was eventually able to get ahead, but doing so was difficult, especially since I had less available credit than I needed to float my operation while we collected receivables. Despite overcoming this problem, sometimes I felt like the end was near—such as when I had to print a new issue but still hadn’t received money from advertisers in previous issues. It was not a good feeling at all.

Negative cash flow is not a bad thing per se. In fact, it is necessary for many businesses in numerous industries, particularly if the business is in the start-up phase. However, maintaining a negative cash flow position for too long is detrimental to any business. Your goal as leader should be to find out what the norms are for your industry and what is healthy. A financial adviser can also help you understand your options so that you can avoid this financial stumbling block.

Your company can be profitable but headed out of business, leaving you with a heap of debt and a feeling of despair. It happens every day to promising but poorly managed companies. For your business, ensure that you not only do monthly income statements but also monthly cash flow statements. As a result, you will better understand how to avoid a devastating, negative cash flow position, whether by decreasing expenses, tightening your sales cycle, or receiving a cash infusion. Ultimately, you can avoid a rude awakening and some start-up frustration.

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