Cash Flow Crucial to Small Business Survival and Growth

February 27, 2012

"A business lives and dies by its cash flow," said Dallas Meggitt, co-owner of Sound & Sea Technology Engineering, in HeraldNet. GDT Well Service, Inc. knew the importance of cash flow. The growing business struggled to nurture it because of the time needed to manage cash flow.

"I was 100% focused in cash flow, just to make sure the business kept running," George Del Toro, GDT Well Service, Inc. wrote in his financing testimonial. "In the meantime demand for our services went through the roof and I found myself not being able to comply with my commitments to customers. Something had to give."

Ask SCORE does a nice job of explaining the basics of managing business cash flow and its dependency on accounts receivables. (The article includes a 12-month cash flow statement template for Excel along with instructions to figure out how much cash is available to your business.)

"To begin, you start with all available cash on hand. This does not include money owed to you. You cannot spend accounts receivables," wrote Ask SCORE. That's where many businesses go wrong -- they see the money owed as money they have.

When creating invoices, the software or report often shows accounts receivables as money the business has. While it's true the business earned the money, it's not money in the bank available for spending. That's why it's important to have a cash flow statement to reflect the actual cash the business can use to make payroll and buy products and services to support the business.

Several banks had turned down Del Toro's request for a loan. Instead of getting a line of credit that requires paying back with interest, he received funding for his accounts receivables -- money that the company had already earned. Invoice receivables financing allowed his company to get invoices paid faster without holding up the rest of the process of making payroll and paying for expenses.

As a result, GDT Well Service, Inc. tripled business. Also, Del Toro only spends 30 minutes a week doing cash flow management instead of spending the bulk of his time on it. Now he focuses that time where it belongs -- on customers and the business.

Businesses, successful ones included, sometimes need financing support to avoid slipping into the cycle of getting paid late, paying expenses late and not having the money to grow.

Businesses receiving payment for invoices on time and making payments on time may find it hard to grow the business without financing. Growth requires more resources than you have. Financing helps a business get more of what it needs to handle more customers and bigger orders.