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Small business cash control; understanding the difference between cash and profit

This mini-essay discusses one of the top five reasons why small businesses fail: running out of money.

How can this business be out of cash? We've been turning a profit for months and sales are growing.

Do not confuse cash and profits. The business owner cannot spend profits--only cash. Moreover cash must be available, when needed, to keep the business in business.

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How to control cash flow

Every year, thousands of otherwise viable firms go under because they run out of ready cash. However, crises like this are entirely predictable. Here's how to peer into the future and stay in control.

Cash is not the same as sales, and people don't pay you until long after you've had to pay for wages, stock and materials. Other demands, like taxes, seem to build up then hit you with a bang. Unless you've put aside sufficient cash for these, you're in trouble. The solution is to plan ahead and forecast the flow of cash in and out. It is actually surprisingly easy to do this.

Plan ahead

Very simply, cash flow forecasting is the process of estimating all incoming and outgoing cash, and converting this into a month-by-month projection.

Lay out a simple grid with columns across for the next twelve months and list down the side your income and expenses. Total these for each month to see your net cash inflow and outflow.

Spreadsheets lend themselves to cash flow forecasts but you can also do them on paper. If you use a spreadsheet package, do some back-of-the-envelope checks to ensure your ...

Solution Summary

The 787 word solution is a very sensible view of good business techniques regarding cash uses and cash control.