In a recent survey, U.S. Bank reported that 82% of small businesses either lack an understanding of how to manage cash flow or ineffectively execute wise cash flow practices.

It seems that many business owners have an informal method of tracking cash that is predominantly kept in their heads while the business is small. But as a business starts to grow and become more complicated, tracking the ins and outs of cash becomes increasingly more critical and complicated.

Given that lack of cash or lack of control over cash is one of the top 5 reasons that businesses fail, it is imperative that business owners prioritize a formal process for understanding and tracking cash flow.

What do cash flow problems look like?

Businesses that lack solid controls around cash tend to face the following problems:

• Inability to obtain financing – Banks want to see how cash flows through the business to see if the business has the capacity to pay back a potential loan. They also want to know that the business owner has the tools in place to see a problem in advance when there is still time to be proactive.
• Inability to grow – Many businesses fail because they don’t have the cash to pay for inventory, key staff, marketing, equipment or space. Sales may seem like a sign of success, but not if the business is unable to fulfill the promises made in the sale.
• Feeling out of control – Cash flow problems feel like there is always money going out the door and there is never relief. Most business owners experiencing these types of problems are losing sleep and often feel ready to “throw in the towel”.

The biggest problem is that these business owners are essentially operating in the dark.

The answer

Every business should have a 13-week cash flow model. This model lays out projected cash receipts and expenditures week by week starting with the current week and ending 13 weeks into the future. The more detail the better.

Having these numbers laid out on a spreadsheet allows the business owner, and other advisors to essentially see into the future.  Cash shortfalls can be identified in advance while there is time to form a plan. Owners can proactively reach out to investors and lending sources with a clear picture of where they’re going and what they need.