Independently owned businesses face many challenges in their day-to-day operations. The most frequent financial problem is described in various terms, but is universally known as a cash-flow problem.
The problem can be summed up as an unexpected shortage of cash.
George, my partner in some ventures, and I held several webinars to learn how solo entrepreneurs handle their cash management. The overwhelming concern from those webinars was a desperate need to avoid cash-flow problems.
When asked how they managed their finances, most had no formal financial tool for cash-flow projections and management. The common accounting programs, such as QuickBooks TM, were criticized as useless. I was a bit surprised because QuickBooks and similar programs have cash-flow management tools. However, they are typically not easy to use, and that proved to be the source of the problem.
Although the programs don’t require knowledge of accounting and double-entry bookkeeping to set up and use on a fundamental level, that knowledge is needed to effectively apply the more sophisticated segments of the programs. Almost every attendee had purchased, and then abandoned, an accounting program.
The problem boiled down to a need to project the sources of and uses for their cash over future periods, usually several weeks to several months. The owners were often surprised by a lack of cash at a critical time.
Banks have tightened their lending criteria and don’t look with favor on businesses requesting a loan to cover a surprise need for cash due in a couple of days. They expect the business to be on top of their cash needs and to be talking to the bank well in advance of the expected cash shortfall.
Some business owners attempted to create a cash-flow management application using a spreadsheet, such as Excel. This worked reasonably well for simple businesses with easily projected income and expenses. However, the model needed for more complex operations with fluctuating income, several profit centers and a number of loans is too sophisticated for a casual user of spreadsheets to build.
We pressed the owners to ask their accountants or advisers for help. The common complaints were that they did not understand the explanations or that the accountant provided Profit & Loss Statements rather than cash-flow projections. Some were given the formal Cash Flow Statements prepared for financial statements but that are useless for projections. The frustration level was high, and the comments were harsh and pointed.
We were frustrated as well when we were asked to name a cash-flow tool that was easy to use and would help the owners avoid or overcome cash-flow crunches because we know of no such tool.
In the meantime, we encourage anyone concerned about cash-flow management to work closely with his or her accountants. They do understand cash flow and, guided by your questions, can perhaps help with your planning.
Bowser@BusinessValueInsights.com. Dan Bowser is president of Value Insights, Inc. of Durango, Chandler, Arizona, and Summerville, Pennsylvania.