![\"Sandra](\"http:\/\/www.financenewmexico.org\/userfiles\/sandrataylor1(1).jpg\")
Sandra Taylor Sawyer, Director, SBDC at Clovis Community College<\/p><\/div>\n
Business failure isn\u2019t always the fault of bad planning or mismanagement of money or resources. When markets freeze and retreat as they have around the world, many businesses fail for lack of credit, loss of consumer confidence and other reasons over which an individual business owner has no control.<\/p>\n
Cash-flow imbalance is the leading cause of business failure in a healthy economy, according to the U.S. Small Business Administration. So when the economy is ailing, it\u2019s more urgent than ever to maintain a balance between what\u2019s flowing into the business and what\u2019s flowing out.<\/p>\n
Cash rules<\/strong><\/p>\n In business, cash truly is sovereign. It\u2019s used to pay short-term bills, cover unexpected emergencies and invest for future business needs.<\/p>\n The way cash flows into and out of a business \u2014 the operating or cash cycle \u2014 is a matter of timing. Here\u2019s how it\u2019s supposed to work: Cash enters the business as capital through loans from creditors and investment from owners. Cash then is used to produce goods or services; it flows out to pay wages and purchase buildings, equipment, materials and supplies. Next it flows back to the business as payment for goods or services. Finally, it flows out again to pay taxes and debts and return money to owners before starting again at the beginning.<\/p>\n <\/p>\n A breakdown at any stage can throw the operating cycle out of sync.<\/p>\n What to watch for The time between buying or producing inventory and unloading it poses another potential obstacle in the cash-flow current. Toyota narrowed this gap with its \u201cJust in Time\u201d concept starting in the 1970s; rather than keep a large inventory of raw materials on hand to build cars, the company bought materials as they were needed on the production line. Other businesses can use this same technique to quickly convert inventory to cash, and they can sell old and obsolete inventory to free up cash for other uses.<\/p>\n Expanding a business too quickly can also impede cash flow. According to David H. Bangs Jr., author of The Business Planning Guide, a business should not expand until employee overtime is piling up, the business has outgrown its operating plant or office space and there\u2019s a list of customers waiting to buy a product or service.<\/p>\n Why it matters But there\u2019s more to profitability than managing income and expenses. In this case, timing \u2014 the efficient management of cash as it cycles in and out of the company \u2014 is everything.<\/p>\n Learn more about the New Mexico Small Business Development Centers<\/span><\/strong><\/a>.<\/p>\n Article 78<\/p>\n Download 78_Cash Flow for Small Business PDF<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Cash flow – and threats to it – is discussed as a financial statement item to watch during tough economic times. Continue reading
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\nBreakdowns often happen in current assets, those cash reserves and other liquid assets \u2014 marketable securities, inventory and accounts receivable \u2014 the business expects to convert to cash within a year. Of these assets, accounts receivable are the most difficult to convert to cash. Businesses can avoid this pitfall by closely monitoring accounts receivable and establishing firm collections and credit policies before extending credit.<\/p>\n
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\nA stash of cash is the best assurance of keeping cash flow positive. Cash reserves are a cushion to fall back on during hard times.<\/p>\n