New Businesses and Cash Flow: What Every Entrepreneur Should Know

Paying attention to cash flow helps you avoid disaster

March 22, 2018 | Denise Gifford

cash flowWhether you’re an entrepreneur or a freelancer, being responsible for your own business is empowering and exciting. The possibilities are endless, but so are the risks, particularly financial risk. In fact, one of the main reasons that new businesses fail is that they aren’t sufficiently funded. Too often, business owners focus on funding startup costs but fail to develop skills to manage the ongoing, day to day cash flow needs of their business. Paying attention to cash flow not only helps you avoid disaster; it also sets your business up for smoother ongoing operations by ensuring that cash is there when needed.

When I was a banker, I found that many of my small business customers had little knowledge of how their cash flow worked. Often, their stated reason for seeking a loan or line of credit was “to support cash flow needs,” but they couldn’t describe what had actually led to the cash flow glitch. They just knew they were frequently tight on cash and needed the breathing room that bank credit would give them. What I found amongst these customers was a lack of curiosity about how their cash flow worked. Maybe it was due to fear; as one of my accountant friends once told me, “entrepreneurs have a fear of numbers.” Maybe it was wishful thinking, a kind of hope that somehow it will all work out.

But avoiding a deep dive into understanding cash flow means you are not only endangering your business, but missing opportunities to improve it. Getting a handle on historical and anticipated cash flow gives you and your managers important input for decision-making and long-range planning.

“Our philosophy was that if we didn’t have cash, we didn’t have a business,” said Zeynep Ilgaz, CEO of Confirm Biosciences, Inc., reflecting on how her small business grew to $14 million in revenue from a $2,500, self-funded investment. According to Ilgaz, one of the keys to this successful growth was a “laser-focus” on cash flow, implementing strategies to “bring cash in as fast as possible and slow down paying cash out,” emphasizing forecasting and understanding cash needs throughout her company’s operating cycle, and building strong relationships with vendors, suppliers, creditors, and banks.

On the surface, it seems that getting a handle on cash flow should be relatively easy. Money comes in and it goes out, and that’s cash flow, right? But each business has different cash flow timing and needs, and it is only by closely watching the ins and outs that a business owner can begin to get a handle on its unique rhythm. The key to learning this is a combination of what I call detective work and contingency planning:

Detective work is all about asking questions and digging deeper. Important questions to ask include: what does my monthly cash flow look like? What are the differences, month to month? Are there times when cash flow is particularly thin? If cash balances trend lowest on Tuesdays, for example, why might that be the case?

Contingency planning is asking the “what ifs” of your business, and then planning ahead. For example, what happens if customers pay late? Or if a major customer goes out of business? What if your company has maintenance or repair costs that weren’t anticipated? Contingency planning allows you to anticipate these scenarios and react by setting cash aside, getting money upfront, changing payment terms, etc.

In today’s business world, it’s especially important to responsibly manage your cash flow because credit standards tightened after 2008—and the smaller your business, the tougher it is to find affordable loans. Staying on top of your cash flow will not only keep you in business, but will help your company adapt and become resilient, two key competencies in the future of work. Anticipatory cash flow management lets your business weather storms while taking advantage of opportunities.

The expression “cash is king” still holds true, and cash flow can work for you if you understand and get on top of it. That means understanding the unique operating cycle of your business, and how that gives rise to the timing of cash needs. It means thinking through “what if” scenarios and how your company can adapt and thrive by planning ahead. There’s opportunity and reward for entrepreneurs and freelancers who can do this; they just might find that they stay in business longer and gain market share from competitors who failed because they didn’t pay attention to the importance of cash flow.

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  • About The Author
  • As co-founder of InfoWorks® International, Denise has worked with clients worldwide to provide consulting and training in key business competencies such as project management, leadership, sales and marketing, finance, process improvement, and communication. She has managed teams of professionals from a variety of disciplines to bring integrated solutions to business needs. Prior to leading InfoWorks, Denise worked in sales and marketing management, and as a consultant to the financial services industry. She holds her MBA from Northwestern University’s Kellogg School of Management.