D. R. James Consulting, LLC

Profitable businesses close their doors every year. That sentence surprises people, and it should not: profit is an accounting measure, and cash is what pays the rent. A business can be profitable on paper and still run out of money, and when it runs out of money the story ends there.

The Difference, in One Example

You invoice a client for a large project in March and the work is done. Your profit and loss statement for March looks excellent. The client pays in June. Meanwhile you have paid your contractors, your software renewals and your own household bills out of March, April and May.

Nothing has gone wrong with the business. You are simply funding your client’s ninety days out of your own pocket — and that is a cash flow problem, not a profit problem.

Know Your Cash Cycle

Every business has a rhythm: money goes out to deliver the work, and money comes in when the customer pays. The distance between those two points is your cash cycle, and the longer it is, the more cash you need standing by just to stay open.

Shortening that distance is usually the highest-value thing a small business owner can do. It does not require more sales. It requires better timing.

Practical Ways to Shorten It

• Invoice the day the work is finished, not at the end of the month. A week of your own delay is a week of your own money.
• Make payment terms explicit before you start, in writing, including what happens when payment is late.
• Take a deposit on larger engagements. It funds the work, and it also tells you a great deal about the client.
• Give people an easy way to pay you. Every extra step between the invoice and the payment adds days.
• Follow up on the first day an invoice is late, politely and automatically. Most late payments are not refusals; they are oversights.
• Do not chase revenue you already know collects slowly without pricing that delay into the work.

Look Forward, Not Only Back

Financial statements report on what already happened. A cash flow forecast is the one tool that looks at what is about to happen, and it is far simpler than it sounds.

Take the next thirteen weeks, one column each. In each column write the cash you genuinely expect to come in, and the cash you know must go out — payroll, rent, loan payments, tax set-asides, subscriptions. Carry the balance forward week to week.

The value is not in the precision. It is that you will see a tight week five weeks before you reach it, while you still have five weeks of options. Found on the day it arrives, the same week has none.

Build a Buffer, Then Protect It

The goal most small businesses should aim at is enough cash on hand to cover several months of fixed costs, held separately from the account you spend from every day. And when tax money and sales tax move through your business, they are not your money. Moving them into a separate account the moment they arrive prevents the most common cash emergency there is: a tax bill that was spent months before it was due.

Watch These Signs

• You are increasingly reliant on a credit card to smooth out the month.
• Receivables are growing faster than revenue.
• You cannot answer, without checking, what must be paid over the next thirty days.
• Payroll requires a conversation with the bank balance.

None of these mean the business is failing. They mean cash needs attention, and cash responds quickly to attention.