Category Archives: Finance

Cash (Flow) Really Is King

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One of the most important lessons entrepreneurs have to learn, often painfully, is that cash really is king. I’m not talking about paper money — I’m talking about cash flow. Simply put, it doesn’t matter how much money is coming in the future if you don’t have enough money to get from here to there. Employees can’t wait on paychecks until your customers pay. Your landlord doesn’t care that you’re talking to investors and will have the money in a couple of months. Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need in order to deliver to your customer and receive payment.

How to Project Cash Flow

  1. Start with the amount of cash on hand – your current bank account balance(s) plus actual currency and coin.
  2. Make a list of anticipated inflows – customer payments, collection on bad debts, interest or investment earnings, etc. List not only the amount, but also when it will be coming in.
  3. Make a similar list of anticipated outflows – payroll, monthly overhead, payments on accounts payable or other debt, taxes payable or set aside for future payment, equipment purchases, marketing expenses, etc.
  4. Put it all into a spreadsheet in chronological order. If at any point you have negative cash balance, or even a very small one, you have a potential problem.
  5. It’s best to be extremely conservative, i.e., estimate inflows lower and sooner and outflows higher and later. If you end up with a cash surplus, it can cover you for an unanticipated cash shortage in the future, or be invested in something to help grow your business – you won’t have a problem finding something useful to do with the money. On the other hand, if you end up with an unanticipated cash shortfall, you can end up damaging your credit, losing suppliers, having to cut employees, or out of business entirely.

Track Your Actuals

Keep a copy of your forecast, but track your actual cash flow as well. Comparing it to your forecast will help you realize where you have mis-estimated or overlooked something in your planning. Past cash flow statements and future cash flow projects are among the core financials you will need as part of your business plan for potential investors. After a few months of tracking it, you’ll also find it an indispensable management tool.

Do You Have Any of These Costly Money Habits?

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Here’s How to Break Free…
When it comes to our money, we all try to act rationally… yet we often fail. I call this phenomenon “money madness.”
Back when the economy was strong, our bad money habits might not have hurt us very much — but these days, financial irrationality can be much more costly. Here’s how to recognize if you have any of these five common forms of money madness — and how to cure them…• Gut player. You always trust your instinct on money matters. You hang on to stocks because you “have a good feeling about them” — even though their prices have become very high or have plunged way beyond the rest of the market’s dive. You bought your house or your car because you “fell in love with it” — even though it cost more than you meant to spend.

Even experienced money pros sometimes fall into this trap — they convince themselves that their instincts are right, and therefore the numbers must be wrong.

Solution: Describe the situation to your spouse or a friend, and solicit his/her input. Money novices often ask the smart questions and raise the crucial topics that “money experts” fail to confront when they trust their instincts.

• Home-run swinger. You want big, fast payoffs on your investments. You’re willing to take big risks to hit financial home runs.

Truth: It isn’t really big financial gains you’re after — it’s the adrenaline rush that comes from taking risks.

Solution: First, make a list of the times that you have tried for a big financial score and failed. Figure out and record how much each of these losses has cost you.

Next, set up a plan that automatically takes money from your bank account and puts it in a diversified portfolio of investments appropriate for your goals and time horizons. Any mutual fund company can help you do this. An automatic plan takes future investment decisions largely out of your hands, making it more difficult for you to impulsively gamble with your savings.

• Prisoner of spending. You waste money on things that you don’t need and run up credit card bills that you can’t afford to pay.

Solution: Take a one-month sabbatical from credit cards each year. You’ll likely discover that you don’t enjoy spending nearly as much when you have to hand over your hard-earned cash rather than just whip out a credit card.

And by the end of the month, you should have a better idea of what kinds of things you truly need.

• Money mute. You can’t or won’t talk about your current financial situation, even with your spouse. This could be costing you money.

Examples: If you can’t tell your spouse that money is tight, he/she might overspend. If you can’t talk to other couples about your budget constraints, they might pressure you into spending more on activities, such as eating out, than you can afford. If you don’t level with your accountant, insurance agent or investment adviser, you might incur penalties or take on more risk than you can tolerate.