FORTUNE Small Business:

Lots of money but always broke

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

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(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

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