Pay Bills with Cash, Not Profit

Most new businesses and most growing businesses have the same problem. Cash, the lifeblood of business, is scarce. Meeting payment obligations is a problem. Some businesses even fail because although profit is excellent, there is not enough cash to pay the bills.

Thus, the basic principle of business: “Cash is King.” CASH, NOT PROFIT, pays the bills. Without cash the walls will tumble down. The problem is worst for three kinds of businesses: those that are starting and need cash to finance the startup; those that are growing quickly and need cash to support the growth, and those that are declining and need cash to offset losses.

It is amazing how many businesses do not forecast cash flow. Profit forecasts abound, and of course are valuable. But the basic tenet, bills are paid with cash, not profit, seems forgotten, and forecasts of cash flow frequently don’t exist – even in many well run companies.

Without a forecast of cash flow, companies react to cash shortages. With a forecast, companies can be proactive about cash flow problems and take steps in advance to alleviate cash shortages. Cash forecasting leads to cash planning.

Cash flow forecasts can be simple or very complex. For a simple forecast use a form like the one shown below. In the disbursements (payments) column show what payments are coming up, and when. Don’t forget unusual payments, like quarterly payroll taxes, or insurance premiums and annual licenses or fees. Also include payments for new equipment, inventory, WAGES, etc.

In the income column show all the expected income, and when it will be received. If the business has accounts receivable, be sure to use the date the money will come in, not when the sales are made.

Date	Item	Cash In (Received)	Cash Out (Paid)	Balance
	Beginning balance

The beginning cash balance shown in the first line is the amount of cash on hand when the forecast is begun.

If a cash shortage is seen in the forecast there are many ways to resolve the issue. Slow down the payments schedule by negotiating with vendors for extended time to pay. Speed up receipts by shortening credit terms or offering discounts for early payment. Use credit cards or establish a bank line of credit to cover the cash shortages. Use personal cash resources if necessary, or borrow from family or friends.

For fast growing businesses, even consider slowing down the rate of growth so the profit earned can stay even with the expanded need for cash

Careful cash forecasting and management can solve many problems. Forecasting discipline and spending discipline save many a business that would otherwise fail.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.