Skip navigation

QAdeniseoberry_Body.jpgby Susan Caminiti.


Taking the time to understand your company’s cash flow is crucial to the health—and longevity—of your small business. So says Denise O’Berry, a Tampa-based small business consultant and author of Small Business Cash Flow: Strategies for Making Your Business a Financial Success. Recently, O’Berry spoke with business writer Susan Caminiti to explain this important financial indicator and why entrepreneurs should not neglect it.



SC: We often hear small business owners talk about profits and cash flow as if they’re the same thing. What’s the difference?

DO: Cash flow is exactly what the words imply: It’s a look at how the cash flows into and out of your company. Now there are two forms of cash to look at. Income is the money you bring into the business for the services you provide or the products you sell. Expenses are defined as the money you spend to run your business. Profit is what’s left over after all your expenses are paid. So the terms profits and cash flow are not interchangeable.



SC: Can you explain why it’s so important for a small business owner to understand and focus on cash flow?

DO: Cash flow tells a really important story about your business and how things are going. Let’s say you sell a product. Your cash flow can tell you how much of that product you’re selling in any given time period, if you have seasonal peaks and valleys, and what changes you might have to make as a result of that. Now the one thing I always tell small business owners is that cash flow is a backward-looking snapshot of your business. In addition to a cash flow statement, I always recommend to small business owners that they create a cash flow budget or cash flow forecast for the next six months or so.



QAdeniseoberry_PQ.jpgSC: Why is that important?

DO: For one thing, it helps them sleep better at night. A cash flow statement helps you understand the history of your business, but a forecast can help you understand what’s projected to happen down the road—and help you better prepare for it. Let’s say you have a big insurance bill that comes due once a year, and it happens to hit during one of those seasonal times when business is typically a little slow. Would you rather know today that in four months you’re going to take a hit to your cash flow and be prepared, or would you rather open up that bill four months from now and think, ‘Oh no, where am I going to come up with the money for this?’ That’s the purpose of a cash flow budget. It gives you time to deal with, and change, the outcome of future cash flow without being in a panic situation.



SC: In your experience, do most small business owners take the time to understand their cash flow?

DO: No, not really. And I think the reason why is because many small business owners relate cash flow to math and math is that horrible, boring subject that people don’t want to deal with. But in reality, cash flow doesn’t really have to do with math. It has to do with the story of your business and how it’s doing in the marketplace. Just think about it: So many small business owners are focused on marketing because marketing is sexy and cash flow is not. They think it’s boring. But if you deal with it on a consistent basis, cash flow will tell you how successful you’ve been with those marketing efforts or any other strategies you use.



SC: How often should small business owners look at cash flow?

DO: At the very least, I would say monthly. But you can also look at it weekly or even more frequently than that. The sad part is that so many small business owners only look at it once a year when they’re meeting with their accountant. I worked with one small business that thought that as long as there was money in the checking account they were cash flow positive. They didn’t know what was happening on the expense side. Eventually they went out of business.



SC: What about payments from clients and customers? What can small business owners do in this area to maximize cash?

DO: Small businesses in the service sector usually provide the service and then bill the client. It’s really not smart. It’s called being a bank for your customers and I advise small businesses against it.



SC: Why?

DO: What ends up happening is that there’s a huge delay. If it takes a week to do the work and then another week to invoice and you give the client 30 days to pay, the small business is already waiting six weeks to get paid. They’ve been a bank for their customer for six weeks. Or they send out the invoice in a timely manner, but don’t put a due date on it. How many bills do you pay that don’t have a due date on them?



SC: So what’s the smarter way?

DO: Get your money up front, or at least a portion of the payment up front and the rest upon completion. Now I’ve had clients say to me that their customers would never agree to those terms. And I tell them that they probably have the wrong clients. It’s not an unreasonable request. And on your invoice put net five days, not 30. I don’t know who decided it has to be net 30 days. If you’ve targeted your market correctly, it should not be a problem. After all, that’s the beauty of having your own small business. You can create the rules.



This interview has been edited and condensed.

Filter Article

By tag: