Cash flow.....?

I'm going to tackle a subject that for me has been the most difficult thing to learn in business -- cash flow management. I'm not even sure that I'm using the definition properly: call this a working man's definition.

For me, cash flow is having the money in the bank as the bills come due.

Easy, right? If you make, say, 15 thousand in revenues, and you have 15 thousand in costs, you've broken even.

But what happens if 2/3rds the revenue comes in the second half of the month; and 2/3rds of the bills come due in the first half of of the month? Then compound that with product that arrives on a quarterly basis -- like the newest release of Magic, or comes in seasonal waves, like for summer or Christmas, and arrives in the off season? So that the largest quantities show up at a time when the least sales are happening?

All for material you're ordering in advance. All for material you are more or less guessing at the quantity and speed which it will sell.

So, for example, let's say you get the newest wave of Magic at the first of May. You have to order in bulk to save on shipping and get the highest discount, plus my wholesaler gives me other incentives to order more. I order what I know I can safely sell in a couple of months. So, let's say I have 1500.00 worth of Magic arrive. Even at a best case scenario, I'm likely to sell only 150.00 a day; so it will take me 10 days to gain back the gross amount. But remember I have to pay overhead and bills in that same 10 days, so only 60% of that is COG's; it really takes me more like 17 days to pay. Add in the complication that by the time you get down to the last boxes, you have to reorder.

A further complication; you have four different types of Magic arrive. One sells out right away, the other sells a bit better than the other two, and you have to reorder those 2 items before you've even gain back the initial costs.

Compound that with every product in the store.

What happens if, say, a couple of skyscrapers and 2000 Americans are destroyed by terrorists? What happens if a madman invades Kuwait (or Iraq)? What happens if, the week before Christmas, 2 feet of snow drops and and paralyzes traffic?

About the only sure answer you can have to cash flow problems is to have an entire month's revenue in savings -- and even then, you have to manage the flow of bills.

For a business that is teetering, or trying to pull itself up by it's bootstraps, having an entire months savings in the accounts can seem like a pipe dream. That money isn't working for anything, so if you see an opportunity and you spend it, it's gone.

Any and all growth has to come out of cash flow as well, unless you borrow the money.

Then there is the problem of too much growth. A problem you think all businesses should have, right?

But imagine this; you buy 2000.00 worth of sports cards and sell them out in a couple of weeks. You take the entire 2000.00 and buy more product, and you sell them out in 2 more weeks, and so on. Let's say, you have exponential growth (doubling sales) every year for five years.

You must be doing pretty good.

Actually, even if your Cost of Goods is 50% (and it's more likely, your COG's will be 55 or 60%) you've spent every dime you made on product. And probably more. Anything less than 50% margins and you've probably borrowed money just to keep up.

And then....a customer walks in the door one day and tells you he bought a box of cards at Costgo for 10.00 that you have just purchased from your wholesaler at 11.50. Your sales drop in half overnight. You have six months worth of product ordered and or paid for.

You go into debt, or you go out of business.

I've gotten pretty good at timing my bills -- that is, scheduling them for times when I know the cash will be there. Sometimes it means putting off an order for a week. Sometimes it means ordering less, and getting less of a discount and or paying more postage.

Cash flow requires constant vigilance. Constant monitoring of how fast and how much of every item you have in the store is selling.

It took me 20 years, but I finally have enough in the accounts to pay for checks as they come due. But that money won't be there for very long if I mismanage the cash flow.