3 Cash Flow Nightmares

If you are starting a new business, applying for a loan, or seeking investment for your business your cash flow projections will be incredibly important to your success.  You might think you can get away without writing a full business plan, and you may be right, but don’t for a minute consider operating without a cash flow projection for the next 12 months.  You owe it to the people who are counting on your business to succeed to stay on top of your cash flow situation.  SCORE has put together a wonderful 12 Month Cash Flow Projections Template.  As you complete your cash flow projection it is important to keep in mind what can go wrong.  Here are 3 cash flow projection nightmares.

1.  Profits Versus Cash Flow – The first thing to remember when it comes to cash flow is that profits do not equal positive cash flow.  Every year profitable companies close their doors because, despite their profits, they could not manage their cash.  How is this possible?  Imagine you sell a product or service to a major pharmaceutical company.  All of a sudden they double their order.  Great news right?  The new job will require you to hire two new employees to fulfill the order.  Because you are working with a multi billion dollar company, they have all of the leverage to set the terms of the order.  The contract stipulates that you are not allowed to invoice for the work until the order is complete and delivered.  The only problem is that you will have to pay salaries for the two new employees for 3 months before you can invoice.  But that is not all.  The company will typically not pay their invoices for 60 days or more.  So despite the fact that you just landed a lucrative contract you may not be able to come up with the cash to survive the 5 months you will need to wait before you see your first payment.

2.  Bad Debt – What could be worse than waiting 5 months to get paid?  Never getting paid.  Depending on your industry you can expect 1% to 10% of your sales to result in bad debt expense.  In other words, you will provide a product or service to a customer who never pays.  Hopefully you will plan for bad debt based on your industry averages as you develop your cash flow projection, but what happens when your projections are wrong?  What happens when you never get paid for a large job because a major corporation goes bankrupt?  The point is, leave as much flexibility in your cash position as possible.  Run some worst case scenario projections as well so that you can start to think about plan B… just in case.

3.  Forgotten Expenses – Finally, something as simple as surprise expenses can wreak havoc on your cash flow.  You would be amazed how many small business owners forget to budget for items like:

• Property Taxes
• Licenses and Permits
• Insurance
• Business Tax Preparation Fees

Again, make sure that you use a quality cash flow projection template like the one from SCORE, so that you don’t forget any major expenses that will jeopardize the solvency of your business.

Check out the SCORE Cash Flow Template

About the Author:  Adam Hoeksema is the Founder of ExecutivePlan which helps entrepreneurs write powerful business plan executive summaries in order to raise capital.  Adam is also the author of Elevator Pitch Toolkit: Templates, Examples, and Tips for the Perfect Pitch which is now available on Amazon.com

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