Business Owner Mistakes: Not Managing and Predicting Cash Flow Precisely

Cash flow

We’ve all heard it: Cash is king.  Cash in business is like oxygen for business owners. Without it, a business dies.

I had a client who was profitable every month–some months more than others–but still profitable.  A large growth period, however, consumed all the client’s cash and they struggled to make payroll and vendor payments for eight months. We were eventually able to get additional financing to provide adequate working capital to offset the growth in accounts receivable.  We got a grip on accounts receivable and focused on improving accounts receivable turnover to get back to cash flow positive.  It took another several months to repair the vendor relationships.

On the other hand, I had a client that had been unprofitable for several years, but they had survived based on cash flow from current sales and from reductions in inventory.  Eventually, we scaled the business back, and we were able to get back to consistent profitability.

In both cases we had to face facts: cash flow is vital for survival, and not managing it or predicting it precisely can have devastating effects.

Here are a few tips you can use to help you be an expert in cash flow.

  1. Understand it.  Know where your cash flow comes from and where it goes.  Know the cash flow cycle in your business.  Cash receipts are from generally from sales regulated by accounts receivable, and cash disbursements are comprised of cost of sales items, payroll and payroll related costs, and operating expenses regulated by accounts payable and inventory turnover.
  2. Predict it.  Using your forecasted operating plan and a simple cash flow worksheet, develop a forecast process with your team.  Update and review on a weekly basis.  See more from a previous post here.
  3. Improve it.  Work to improve your cash flow numbers.  Improvement of cash flow comes from sales, accounts receivable turnover, inventory turnover, and accounts payable turnover.  Know your numbers and work to improve each one.  See my resource page for cash flow calculation tools.
  4. Protect it.  Consistency in sales and profit helps businesses predict and protect cash.  When our businesses generate extra cash, we need to pay down debt and vendors, and save it.  Excess cash seems to burn a hole in our pocket, and we look for ways to spend it.  We need to think more minimally. What do we really need and what should we invest in for future profits?  When things are good, put cash away for the eventual rainy day. It WILL come.

Get a handle on your cash flow and you’ll be able to breathe easier.

Need some help figuring this out? Contact me.  You may also want to read 7 Keys for Better Cash Flow, available to those who subscribe to my blog.

Business Owner Mistakes: Not Reviewing and Analyzing Sales Data Regularly

Retail store


We’re not in business to make mistakes. But we do. We all have stories about how we slipped up. Hopefully, we didn’t make a HUGE mistake, but if we can learn from it, and avoid making even the smaller ones in the future, we’ll position ourselves for a healthier company overall.

When it comes to the financial side of business, it’s easy to make some mistakes even by omission. So over the next few weeks I’ll be sharing a series on mistake I have seen business owners make. I hope this will help you avoid the same obstacles.

Mistake 1: Not reviewing and analyzing sales data regularly.

I work with many business owners who really don’t track sales at all.  They look at the P&L every month and certainly know the top line, but they don’t understand their customer buying patterns or how their products and strategy are performing.

For example:  A retail store manager sees her monthly P&L and rejoices that she had $7000 in sales this month, and kept expenses down. But she doesn’t drill down and see that nothing ever sells from the brands offered at the back of the store. Or remember that her assistant manager had to overnight an additional supply of scarves that were selling like hotcakes.  If the manager doesn’t think about specific items that are selling or not selling, and instead just smiles when she sees that “sales were good,” she misses an opportunity to focus in on what her customers really want and what may make them come back even more often.

Take time to format your sales data in a way to easily track historical information on an ongoing basis.  Track your overall sales by day, month, quarter and year.  When I do this for clients, if I’m not using dashboard software and the business system is ‘less sophisticated’, I generally use a simple Excel spreadsheet listing all invoices with customer name, product type sold, customer group, and a geographic location.  I use the ‘sumif’ formula to easily track and review overall sales and gross profit by day/month/quarter/year by:

  • Product or product type
  • Customer or customer group
  • Geographical area or distribution channel

If you are an Excel user and don’t use the sumif formula – check out my 4 minute sumif video here.

Using this type of spreadsheet also allows you to analyze the number of purchases by customer and average invoice value. This can be essential to help understand your customer’s buying habits and purchasing cycles.  Remember, the only three ways to grow your top line is to increase the number of customers, increase the number of purchases per year, or increase the average invoice value.  I like to track all three: number of customers, number of purchases and average invoice value.

The sales tracking also brings visibility and accountability to your team to get everyone engaged in sales and profit.  I had a client who simply started tracking daily sales (overall) and posted the results on a whiteboard in the lunch room.  No elaborate dashboard.  Just a simple line graph updated daily with dry erase marker.  This got the entire company engaged and focused on growing their sales.  The company did ~ $125mm last year in revenue.  (The manager still needs to do the deeper analysis.)

It’s also a good idea to allocate all costs to product/segment/geographic area, etc.  All costs including selling, general and administrative (SG&A) expense, depreciation, and interest costs.  It’s not easy to do, but this now allows sorting the product/segment/geographic area by profitability and perform some 80/20 thinking.  You can see where  80% of your profit comes from 20% of your product/segment/geographic area – and 80% of your costs come from 20% of your product/segment/geographic area.

One of my most gifted books this year is The 80/20 Principle, by Richard Koch.  We did this at a $10mm machine shop and determined, among other things, that based on allocating all costs, a gearset they had been producing for years was an unprofitable product.  This caused a bill of material revision and pricing discussions with the customer.  The client’s bottom line noticeably increased immediately.

Many business owners miss reviewing sales consistently throughout the year.  For most small companies, reviewing sales at least weekly is necessary.  It will help you be more engaged with your customer, make you better at forecasting, and allow you to develop a better strategy to increase profitability.