How Cash Flow Can Get You

What would a successful business look like to you?  Would it be profitable every year, and every month?  What if I told you that you can have a profitable business that is short on cash?  Here is a good example of what it is like to have a cash flow crisis:

You take a job that pays you more than plenty enough to pay your bills, so say you make $20,000 per year and your bills are $10,000.  The only problem is that your employer will only issue you a paycheck when they have enough money to pay you.  So business is slow in January, you don’t get paid.  February is much better so they catch you up.  March is really good and they pay you on time.  April business is down so they delay paying you.  Get the picture?  So when you are caught up you have no problem paying your bills but when your employer is behind in paying you then you have a rough time paying your bills.

This example is exactly what happens during a cash flow crunch.  Generally your accounts receivable balloons and your payables are demanding attention.  If you’re like me, your payables are very small but your receivables are big… and you have to make payroll.  I am profitable each and every single month but if my client starts to slow pay, for whatever reason, then I start to feel the pressure.  The bank account dips to near zero and some important bills are just around the corner.

So why do customers pay better some times than others?  Often they are reacting to their own income and payables situation.  They are short on cash so they slow pay their vendors.  Sometimes it’s a matter of how fast paperwork moves through the organization.  Or sometimes the check is just lost in the mail.  All kinds of things happen.

What can you do to make the situation better?  When your accounts receivable (an asset) balloons, the only thing you can do is to increase your debt, sell more stock (or give yourself more money), float your accounts payable more, don’t issue payroll (owe your employees), or pay your payroll taxes on your credit card.  Perhaps you can come up with other solutions, but generally as assets increase you must increase liabilities to keep things in balance… unless of course you are high on cash.  That, my friends, is a nice problem to have but many businesses manage to retain only a bit of cash every month, much of which is taken by Uncle Sam at the end of the year.

I did apply for a business line of credit today to try to deal with the low cash situations.  Honestly, I thought I had my problem taken care of and then the check that was supposed to come this week didn’t.  It got lost or something.  So I must face reality and take some real action, not just hope for the best.  I have a week until payroll and I’m only a bit down, but then federal payroll taxes come just a bit after that.  I am concerned enough that I’m not going to get paid quick enough (because of lost check) that I had to find cash somewhere.

The worst thing about all of this is trying to explain to my wife the difference between not being profitable and having a cash flow problem.  The business of the business is being managed very well, but um just can’t make payroll, and um I need money to pay personal bills.  Crazy isn’t it?

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