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Cash Flow Management Critical to Surviving Recovery

Wednesday, October 20th, 2010 by Jim Walden

I have noticed a recent increase in entrepreneurs with start-up ideas and financers who are willing to support them.  This fits a pattern I have noticed for a long time: when the pain of a recession peaks, new ideas for solving existing consumer and business problems begin to take root.  Although this means new competition for established businesses and products, it’s also an encouraging sign for the future. 

When advising startups, I stress the importance of making sure the new venture is a business and not just an idea or product.   The three elements of a business are often described as the legs of a stool; the business won’t stand without all three being strong.  The business must be able to (1) sell a product/service, (2) produce the product/service, and (3) manage its financial activity.  

It’s the last one on which I would like to focus.  As the business climate improves, smart business leaders will shift their focus from survival to business expansion.  They will see opportunities to increase sales.  What they often don’t see is the impact on cash flow from increased sales and new hiring.  It seems counterintuitive, but cash flow is toughest when sales are rebounding.  Failure to understand this can destroy a business.  If the cash gets spent faster than it’s collected, the business runs out of fuel.   When the fuel runs out, the business sputters and sometimes is forced into bankruptcy.    

If your business has cut back on financial management during the recession, it is critical for you to be focused on financial management as the business begins to grow again.  Don’t let one leg of the stool cause your downfall just when a more forgiving business climate may be approaching.

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