By Rich Best

Serious business owners will quickly grasp the importance of cash flow management. However, when it comes to implementing a cash flow management process, many business owners stumble over some of the most basic concepts, and many are often guided by misconceptions that can lead them astray. To gain a better understanding of cash flow and its mechanics, its sometimes more effective to understand the misconceptions:

“We’re profitable so we don’t have a cash flow problem.” Not necessarily true. Profits are really just an accounting concept and have little or no relationship to cash flow. Profits are reflected on paper, but cash is what the business has to spend, and what it actually receives. If a business that operates on credit uses accrual accounting, it can show a profit even though it doesn’t have the cash to pay the bills.

“We have strong accounts receivables.” While that is a good thing, receivables have, at best, an indirect relationship to cash flow. Receivables are not cash; they are simply promises by your customers that you will be paid at some point in the future.

“We’re still a small company, so cash flow projections really aren’t necessary.” While small businesses may not have as much to work with, it is for that reason they are most at risk when their accounts payable begins to outrun their cash on hand, or when their cash needs exceed their short-term income.

“Cash flow management is too complex for a small business – we can just do it in our heads.” That may be true if the business has just one or two customers and only a few expenses. Beyond that, all of the variables can quickly become unmanageable. Sound cash flow management is no more complex than basic arithmetic coupled with common sense estimates of money-in, money-out and timing. Of course, readily accessible and affordable technology can ensure it gets no more complicated than that.

“We do cash flow projections each year during our annual planning.” A Dun & Bradstreet® study revealed that businesses that do cash flow planning once a year have only a 36 percent survival rate over five years, while those that plan monthly have an 80 percent survival rate. Cash flow projections should be done each month after accounts payable processing.

“We generate a cash flow statement every month.” It’s not the same thing. A cash flow statement simply records how cash has moved in and out of the business in the past. The cash flow projection shows the cash position at intervals in the future.

“We require payment upon receipt, so cash flow projections won’t tell us anything we don’t already know.” They may not tell you what you already know, but they are vital for dealing with the things you don’t know, such as an unexpected change in vendor payment schedules, the sudden need to expand staff, an increase in rates, or the need for additional service – any of which can have a negative impact on your cash flow.

At every stage of a business, cash is its lifeblood, and the failure to manage it effectively could lead to early cardiac arrest. As the business grows, it’s not enough to simply have more cash coming in than going out of the business checking account. Business stability and, ultimately, its survival, require the efficient management of cash inflow, outflow and accumulation.

Most small businesses experience erratic revenues for any number of reasons – seasonal income streams, business interruptions and even growth spurts. It’s because of this that cash-on-hand becomes more critical to the business. In a volatile business environment, simply looking backwards is not enough as it leaves the business vulnerable to unforeseen events.

Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.  Any views expressed in this article may not necessarily be those of Nevada State Bank.