FORTUNE Small Business:

Lots of money but always broke

The importance of creating (and understanding) a cash-flow statement.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)

Get small-business intelligence from the experts. Here's a chance for YOU to ask your pressing small-business questions, and FSB editors will help you get answers from the appropriate experts.
Your name:
* Your e-mail address:
* Your city:
* Your state:
* Your daytime phone #:
* Your questions:

(FORTUNE Small Business) -- Dear FSB: My sister is a photographer's representative and my brother-in-law is an architect. Both run their own businesses. While they have numerous clients and generate billings, they can't manage their money because of late payments. They have to turn to family to borrow. Are there any cash-flow tools or contract templates with fee structures that could help?

- Carolyn, Dallas, Texas

Dear Carolyn: Cash and profit are both very good things, but they're also very different. Understanding the disparity between them could be the key to preventing your sister and brother-in-law's monthly scramble - and calls to you for money.

"A lot of people don't understand the difference between cash and profit," says SCORE counselor John Bjeldanes, who teaches a class about managing cash flow through the organization's San Diego chapter. "Your business can grow and show a profit, and you could still be short on money if the timing of the cash flow is not correct."

"For instance, if you sign a $10 million deal, you won't be collecting a dollar for 75 days, but you still need to start delivering product," says Andre Hinton, a business consultant who works with small business owners in Kansas City through the Kauffman Foundation. A company's cash flow statement is a crucial timing tool, and many small business owners don't realize that their balance sheet is distinct from an income statement, says Hinton.

"The vast number of small companies try to run their business by their income/profit and loss statement, which doesn't show the cash controls, which are in the balance sheet," says Beljanes.

Simple business software can make creating cash flow statements easy. Bjeldanes and Hinton both recommend programs like Sage Software's Peachtree and Intuit Inc (INTU).'s QuickBooks for cash flow statements. SCORE has a free 12-month cash flow template on their website, as well as general cash flow tips. Kauffman offers several on their site.

Offering a discount to clients who pay their bills within 30 days is a common way of encouraging them to pay on time.

"A systematic approach to getting clients to pay is to set up your business so that they're actually paying early," says Bjeldanes. "For instance, if the architect in your family is letting people wait until the drawings are completed until they pay, he's going to have a cash-flow issue. Have them pay up front, or on a retainer."

The most important thing about getting bills paid on time is that whatever system you use you use, "update it religiously," says Bjeldanes.

"One of the things entrepreneurs do when they're having cash flow problems is leave their bills on their desk until they have the money to pay them," he says.
"Then they really don't know where they stand. Enter bills when you get them, and even if you don't pay right away. That way you generate a statement, and know 'here's where I stand' on one piece of paper."  To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
6 products to keep the skies friendly Plane travel can be stressful, especially during the holidays. These things can help keep the peace among travelers. More
2014: Helluva good year for stocks The bull market has been going for 2,115 days. If you put you're money in stocks, it's been a very happy year. More
7 up-and-coming foodie destinations These seven cities are seeing a growing interest in local food boost the economy -- and produce some seriously tasty eats. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.