In the Flow: Effective Cash Management

Beth Smith, a business consultant with the USC Small Business Development Center, talks about keeping track of the money coming in and going out of your company:

Business analysts report that poor management is the main reason for small business failure.

And poor cash management is probably the most frequent stumbling block for entrepreneurs.

Good cash management is simple. It involves:

- Knowing when, where, and how your cash needs will occur.

- Knowing the best sources for meeting additional cash needs.

- Being prepared to meet these needs when they occur, by keeping a good relationship with bankers and other creditors.

The starting point for good cash flow management is developing a cash flow projection.

Smart business owners know how to develop both short-term (weekly or monthly) cash flow projections to help them manage daily cash, and long-term (annual, three year or five year) cash flow projections to help them develop the necessary strategy to meet their business needs.

They also prepare and use historical cash flow statements to understand how they used money in the past.

A cash-flow statement shows the sources and uses of cash and is typically divided into three components:

Operating Cash Flow. Often referred to as working capital, it is the cash flow generated from internal operations. It comes from sales of products or services from your business, and because it is generated internally, it is under your control.

Investing Cash Flow. This is generated internally from non-operating activities. This includes investments in plant and equipment as well as one-time gains or losses.

Financing Cash Flow. This is the cash received by or spent on external sources, such as lenders, investors and shareholders. Examples include a new loan, the repayment of a loan, the issuance of stock and the payment of dividend.

No business can be sustained if it is always borrowing in order to make ends meet. But, understanding the three types of cash flow and knowing how to manage each enables an owner to stay on top of the business.

And when it is time to seek additional cash from bankers or other creditors, the previous three years of financials will show off the health of the business.