Cash flow: important for your small business.

• Position: Indiana SMALL BUSINESS REFERENCE GUIDE

Entrepreneurship requires creativity and a wide range of business skills. When you own a small business, you wear many hats: accountant, director of marketing, ombudsman and head salesperson, just to name a few. And, of the many things you need to know when running a business, the status of your cash flow is among the most important.

How important? Consider this: Lack of adequate cash flow is probably the single greatest reason businesses fail. Typically, the business fails because it was unrealistic; that is, it either overestimated upcoming income or underestimated future expenses. Either way, the business did not foresee and prepare for a looming cash-flow crunch. That is a critical mistake. Think of cash flow as your business oxygen--without it, your business will suffocate and die.

The idea of cash flow is surprisingly simple: Do you have enough money coming in every month, consistently, to meet your expenses and whatever emergencies may arise? The way to know this is to create a cash-flow statement. This is a simple spreadsheet in which you enter all of your monthly business expenses along with your projected monthly income. Ideally, you would do this for the next 12 months, but even a three-month projection is useful. Either way, by forecasting your cash flow into the future, you are able to realistically see where things are headed and make adjustments as necessary with time to spare.

As you do this, remember that not everyone will pay on time or in full. Avoid forecasting a rosy scenario because that is not how business typically operates. It is instead smarter to have your cash-flow spreadsheet be a "worst-case scenario."...