Cash flow tools you must use- even if you’re consistently profitable

“I’m sorry- I’ll have to check with my manager.”

Well, that’s odd, I thought to myself. I was in a bank teller line about 15 years ago, cashing a check from a fairly new client. I’d been paid 2-3 time before, but I’d simply deposited the cash at my bank. This time, I happened to be near by my client’s bank, so I stopped in.

After a worried look at me, then a brief conversation with the manager, the teller returned to the window. “Sorry- we just have to check for this particular account.” She cashed the check and off I went.

What the heck?

My client was a residential plumbing business that did over $3 million in annual sales. The owner was an industry veteran who had a great reputation, and he had as much business as he could take on.

But he made a mistake that damaged his cash position.

Stick to what you know

Two year earlier, the owner had expanded into commercial plumbing by taking on a job at a new apartment complex. He admitted that the industry was new to him, and he ended up taking a large loss. That loss resulted in a cash outflow, and now he was constantly behind on cash collections. Sure, he ran a profitable business, but he was always just short on the amount of cash he needed to operate each month.

The reason the bank teller had to get her manager was that the plumbing firm’s cash account was frequently overdrawn.

If you move into a new industry or product line, do your homework. If you’re unclear about how to do business, stick to what you know.

The lesson

All businesses, even profitable ones, need to constantly monitor the cash position, because you can’t operate without a sufficient cash balance. If you manage cash well, you may be able operate without accessing a line of credit, and avoid paying interest costs on debt.

What to do next

Here are some tools you can use to monitor your cash balance:

  • Bank reconciliations- don’t wait: Reconcile your bank account within a few days of accessing your bank statement online. Now, that means taking time away from your business to do the accounting, but the time investment is worth it. Your reconciled bank balance is your starting point for cash.


  • Budget: Create a budget before the start of each year, and compare your actual results to your budget each month. The budget will help you understand how much cash you need to operate. Say, for example, that you make a product with a total unit cost of $200, and that you project sales of 3,000 units a month. You need $600,000 to cover your cost of production. If your sales grow 10%, you’ll need 10% more cash to operate.


  • Accounts receivable aging schedule: This report groups your accounts receivable balances, based on the age of each invoice. A typical aging schedule will group receivables as 0 to 30 days, 30 to 60 days, etc. The goal is to minimize the dollar amount of receivables that are old- particularly those invoices that are over 60 days old.


  • Offer discounts: Offer your clients a discount (1% to 2%), if they pay within 10 days. You’ll lose some revenue, but you’ll collect some cash faster- and that will make it easier to operate.


  • Collections: Create a formal, written policy for collections, and enforce the policy. For example, you may email every customer when the invoice is later than 30 days, and call each client when an invoice is 60 days old. If you enforce a policy, people will either start to pay you on time, or stop doing business with you (which is fine, if they always pay late). You may have some uncomfortable conversations, but it’s better to have them sooner than later.

Why you’re in business

You started your business to provide a product or service you believe in- not to invest time chasing after cash. Use these tips to improve your cash flow and gain some peace of mind.

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