Cash Is The Family Jewels
Written by CMG News Contributor, Doug Carleton
With the economy projected to recover more slowly than expected, survival for the next few months for many small businesses may become even more challenging. And possibly, the most important thing you can do is to do absolutely everything possible to preserve cash flow.
PRETEND YOU'RE A RADIOLOGIST
Do an X-ray of your financial statements – especially your cash flow statement and read between the lines. What does it tell you? What does it say about what is on your balance sheet and P&L and how it relates to your cash flow? All three are closely related and you need to understand how and why. A good first step is to make sure that the accounting system that you use to record your business transactions is accurate because if certain things are coded incorrectly it could create a picture of your financial situation that is not accurate.
CASH IS KING
Do a cash flow analysis. Don’t just do one; do a best, conservative, and worst-case analysis. Based on your projections of sales and expenses, you need to see clearly what your burn rate will be under each scenario. Once you have determined what these numbers are, you should be in a strong position to make some serious decisions about your business. Improvement in the economy will be slow. But also, once a successful vaccine is developed and tested, business will begin to improve. As I have said previously, because of the recent dramatic increase in the personal savings rate, there is a lot of cash burning a hole in peoples’ pockets. That was demonstrated in the recent jump in consumer spending when stores started reopening.
So your cash flow projections need to prove to you that you can keep going until people can start putting the fires out in their pockets and spending some of that cash. Once the economy starts to really improve the opportunities for your business may have even expanded because there are going to be thousands more businesses that are going to be gone and one or two of them might have been your competitors. So you may have less competition or possibly pick up customers.
So keep a close watch over the family jewels.
This blog entry is a slightly edited excerpt from Doug Carleton's 'The Daily Life Of A Small Business Owner' series. Doug is a mentor with SCORE, Startup Virginia, and Lighthouse Labs, and has 25+ years of experience in small business finance including 12 years in SBA lending. To contact Doug directly, please email him at firstname.lastname@example.org.