For almost every San Diego business, there is obviously a huge difference between profit and loss and cash flow. Many young businesses get off to a strong start only to find themselves cash starved and struggling to survive. “But my business is really doing well!” In many cases, this comes down to the relationship between accounts receivable and payables. If one business has all of their receivables spread across two or three clients, and another has them spread across hundreds, the impact of a late paid invoice is quite different. If you have fewer clients, it’s important to establish billing practices and terms up front that facilitate timely payment. It almost doesn’t matter how much you sell if you can’t collect from your customers. It is also important to understand the average amount outstanding per client, and to evaluate “clusters” (where 3 of your customers have 80% of your outstanding accounts receivable).
The same is true with the vendors from whom you purchase. Payables are negotiable as well, and it may be necessary to negotiate better terms or lines of credit with suppliers that allow you to bridge the gap between purchase of materials and payment of customer invoices. Vendors may be attempting to hold you to “10 days” or “net 30 days” terms, but if you’ve extended credit terms to your customers and you don’t have enough money coming in you need to understand the implications that will have on cash flow, and the ramifications that will have upon your business. What is the lag in cash flow and how might that be destructive to your business model? Financial statements won’t show this.
Starting a business is an exciting time, and once you’ve established a successful pattern for sustainable business, the next step is often a question of how to leverage that business opportunity and grow. Allen Barron has helped many business go from start up to $1,000,000 in sales, then go from $1 million to $5 million and so on. Each step will bring new challenges, and it is important to have effective business partners who can advise you at many points along the way.