How Do I Know When My Business Is Going to Run out of Money?

You should develop a projected cash flow statement for the business at the same time you prepare the budget. Some of the same information is used in both the budget and cash flow statements, but there are some adjustments necessary.

Your cash flow statement will show you month-by-month what both your net cash in and out and your running total of cash will be. When your cumulative cash balance is negative, the deficit must be covered by some means; for example, by a line of credit.

This statement will also show you your business cycle, which is really important information to have. There will be times during the year when the business is busier than usual. The corresponding peaks of incoming cash, however, will lag behind your business peak times by 30 to 90 days, depending on how tight your accounts receivable policies are. You should ensure that the money collected from your peak business months will cover your expenses for the rest of the year.

The Future: How to Avoid the Cash Crunch before It Hits

There are no magic tricks for making sure that you don't hit the wall in the future. You must constantly monitor your business results as well as both your budget and your cash flow. In larger businesses, the chief financial officer performs these tasks, but if you don't have the budget for a CFO, the CFO'S duties will become your responsibility as an owner/manager. Block off time in your day planner (What? You don't have a day planner? Get one!) to review your financial results once a month. Your business will prosper because of it!