Cash is King! Part 1 back to blog
We have all heard this statement before but nowhere does it apply more than in a small business. You can have the most profitable business in the world and if you don’t have enough cash flow to pay your bills you are very quickly out of business.
The big question business owners often ask is “How can a business be profitable and at the same time run out of cash?” The answer is simple yet complex.
Things to keep in mind:
There are those bills in a business that take money out of the checking account and don’t create an immediate expense. Some of these are principal loan payments, equipment purchases, inventory purchases, distributions out to owners, life insurance premiums paid by the business, pay down of accounts payable, estimated tax payments, sales tax payments, etc.
There are also things that increase your income but do not create immediate cash. For example, an increase in accounts receivable, taking a promissory note from a customer, and providing product and/or services now but you’re taking payments over a period of months.
I have even seen many cases where the client’s sales really start to take off… the accounts receivable gets bigger, the client purchases more inventory, and then they need to invest in some new equipment to handle the new growth. Next thing you know, your new and exciting business just ran out of cash and you can’t meet payroll.
Next month, I will talk about strategies on how to prevent this from happening. I’ll offer ideas on “How to Increase Your Cash Flow” and “Keep the Checkbook Full.”
NOTE: This information should not be considered as tax/legal advice. You should consult your tax/legal advisor regarding your own tax/legal situation.