Cash is the life source for the existence and future of your company. Cash flow meaning the dollars and cents that are flowing in and out of your bank account. It’s not hypotheticals and all those made up numbers in your CRM. Cash, not receivables, not prospective contracts, but CASH that funds every aspect of your company. You can’t pay your employees with the deal you’ve been chasing for 6 months that hasn’t closed yet.

Have I made that point clear yet?

4 ways to protect your cash flow

1. Make decisions on a cash generation basis

The framework for the decisions you’re making should be on a cash generation basis. Especially if cash is a significant constraint for your business. This framework should apply through the lifecycle of your company.

To get practical, let’s look at two potential deals:

Deal #1 is going to take at least 9 months to close, conversations have been bouncing back and forth, terms keep changing and it keeps getting delayed, but could generate $1M in sales.

Deal #2 could close in 3 months because it’s a smaller organization and the team is motivated to make the deal but will only generate $300k. Because of resources, you don’t have the bandwidth to pursue both deals and if you did, you may lose both of them.

The smart move would be to close the smaller deal now so you can have the cash to chase the larger deal down the road, or possibly an even larger deal. Cash is your liquidity and life blood, so getting more of it as soon as possible is a good thing, especially if you’re in growth mode.

To that token, we're moving on to the 2nd one:

2.  Don’t do anything stupid just to get a deal  

Don’t go after deals that have much smaller margins just to say you have a deal closed and put off other non-sexy deals that could provide a larger margin, but may not be as big in $$$. Sales cure all but only when they add to the bottom line. Keep in mind everything else we’re talking about here, especially with margins.

3. Know your cash runway

It goes without saying that you need to know how long the money in your bank account will last. But, what most people don’t think about it how crucial cash runway planning is for new deals. If you enter a deal and you can’t afford to run your business through the lifecycle of a deal, that deal will not only mean nothing financially for you, but will hurt your reputation in the market when you can’t execute. You don’t want that, and it isn’t just about closing deals. Don’t hire people without a full plan to pay for them for a significant amount of time. I’ve seen countless small businesses hire people and then have to let them go within 6 months because they can’t afford them.

Countless startups once touted as “golden children” I know about in Chicago have done this and it’s never a good look and very hard to come back from. This is why having a cash flow forecast is extremely critical for every small business. You have to know how every decision is going to affect how much, or how little, money you have in your bank account. Even big companies actively engage in cash management when considering projects, often resulting in taking on outside financing. It doesn’t matter how big or small you are. It’s important to know how many days of runway you have – at all times.

4. Burn money the smart way

If you’re a CFO, this is probably obvious to you, but more people lose sight of this than you’d think. Run your business with cash efficiency always on your mind.' Many people often forget the valuable lesson taught to us as children where if you have $20, you don’t need to spend it all on Twix bars at the candy store. Similarly, if you raise a million dollars, it doesn’t mean you need to spend it immediately. One of my first clients had raised $250k shortly after I helped them organize their finances and within a few days, I had three different employees out of the sixteen that worked at the company come up and demand a raise. When I questioned them about it, their response was “well, we just raised $250k so I should get some of that.” Not to mention this company was losing $100k a month and the $250k was a drop in the bucket of what was necessary. Saving cash for a rainy day is one of the most overlooked things for a small business. Deals fall through. Partners disappear. Investments don’t happen. No matter who you talk to, regardless if they have the most amazing company on Earth, it happens.

I’ve always told my small business clients they should have at least 3 months of cash in the bank, and ideally 6 months. Investors, board members, and anyone else involved want to see you saving for a rainy day. Obviously they want capital to be deployed. But, even moreso, they want you to not run out of cash. A company with less deployed cash is worth more to them than a company that goes bankrupt. Investors will rarely buy into companies that don’t have cash and if they do, the terms that they do will not be pretty. I’ve seen VCs who know a company has very little cash on hand drag out a deal until that company has no other choice but to take their very unfavorable terms. Granted, these types of underhanded VC practices aren’t widespread, they still happen.  Don’t put yourself in that position.

Bottom line - you have options

Small businesses have more financing options than you think, whether it be debt, investment capital, or a combination of both. I’ve seen many many entrepreneurs not pay themselves so they could have enough money to pay their employees and while admirable, it’s a pity to see. I’ve participated in conversations where CEOs have to tell their employees they don’t have money to pay them and it’s never easy to stomach. Don’t bring in help when it’s too late for them to help and don’t spread yourself so thin that you can’t operate the business you poured your entire life into.


To learn more about how Clockwork helps small businesses realize and work towards a better financial future, create your account to start a free 14-day trial (no credit card required). Connect your QuickBooks Online or Xero account to create your first financial model in minutes.

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