Close attention to cash flow is vital to business survival

I have asked many entrepreneurs where they find the most headaches in running a business, and the most consistent answer is cash flow problems.

There are so many pressure points when cash is short: facing your employees when you cannot make payroll, answering to vendors who do not hesitate to call when payments are late, communicating to customers that you will not be able to deliver an order due to lack of inventory, or facing a default on a credit line with the associated loss of creditworthiness.

Entrepreneurs often confuse cash flow with profits. A company can generate profits and still have cash flow problems. If customers pay late or inventories increase too quickly or the company expends too much for capital improvements in a short period of time, then a firm can easily find itself out of cash and out of business.

I love the founder who is always thinking, talking and working on cash flow. Simply stated, cash flow is the measure of the cash coming in and the cash flowing out in a fixed period of time — weekly, monthly or quarterly. In the beginning, a company may even watch its cash on a daily basis.

Cash control begins with the CEO/founder. A leader who is passionate about cash flow will create a culture in which employees watch expenses and diligently work to maximize revenue. To be successful in cash management, I would suggest that you adopt the following:

• Customize a cash flow statement for your business. Don't use a standard form — you will be more likely to use the report if it is tailored to fit your business. A good cash flow statement will include your starting cash position, followed by all of the sources of cash to the company (product sales, service income, interest income). Cash out will include payroll, marketing/sales expenses, rent, inventory purchases, etc. The difference is your ending balance.

Take the statement and build a "pro forma" (future forecast) look at your cash position. If you need to watch cash closely, build a monthly pro forma and then divide it into four weekly statements. You may also want to construct a couple of views — expected case, worst case, etc.

• Now that you know your needs, begin to secure the capital required to build and grow your business. It may be difficult to borrow from a bank, so look to friends and family, angels or to venture capital. Raising money can take up to three months or more, so give yourself enough time to find your investors.