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Making a Million Bucks Doesn’t Mean You Have Great Cash Flow

DENISE OBERRY President, The Small Business Edge Corp Recent Posts

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May 16, 2009

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I know that sometime in the past you’ve landed on one of those websites that claims to have made $1,290,453.46 in a 24-hour product launch. They even showed you the “proof” by displaying a graphic of their shopping cart.

Even though you know it’s not the whole story, it kind of makes your heart jump into your throat and think, “Gee that could be me.” Then you come to your senses and move on to the next website you wanted to visit.

That is a really smart move because even if they did sell that much in the time frame they claim, they certainly didn’t make that much profit. And even if they made a good profit, that doesn’t mean they are flush with cash flow. See a pattern here?

There are a lot of misconceptions about cash flow. Here is a brief rundown of what cash flow is not. Cash flow is not:

-Your sales revenue
-Your checking account balance
-Your profit

So let’s take a look at the website claim and figure out just how much cash that company might have on hand after their big sales day. Here are some of the expenses that may have been incurred for this brief product launch:

-Product development fees
-Website development fees
-Pay per click advertising fees
-Affiliate sales fees
-Payment processing fees
-Shipping fees

For any product launch, the fees could account for as much as ninety five percent of sales revenue. In this case, that would amount to $1,225,930.78.leaving a measly $64,522.68 in cash. Okay maybe $64k isn’t so measly, but it’s a far cry from that claim they made on their website, isn’t it?

That’s what you need to remember about your cash flow. The amount that ends up after all is said and done is what you should be focusing on. Nothing matters more in your business than having cash flowing in and out (hopefully, more in than out!).

So the question I have for you is, do you? Do you know what your cash flow situation is right now? Do you know what your cash flow projection is for a month from now? Three months from now? Not knowing what your future risk is in terms of cash flow can cause you a lot of sleepless nights, especially with the economy the way it is right now. Here’s what you need to do to solve that problem.

1. Gather up all of your financial statements for the last six months.

2. Enter the financials in a spreadsheet by month. You can use one from Google Docs if you don’t have MS Office. You can find plenty of samples for creating your spreadsheet by doing a search on cash flow budget.

3. Looking at the last six months, enter your projections for the next six months. Don’t forget to enter expenses that occur on an irregular basis like insurance and subscriptions.

4. Keep it updated. Use your spreadsheet to consistently track your cash flow position and you’ll never be surprised again.

Starting and monitoring a cash flow budget makes really good sense for your small business. And it’s one of the most important things you can do for your peace of mind.

Do you use a cash flow budget? Will you start using one now? Please tell me your thoughts by leaving a comment.

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About the Author: Denise O’Berry is a small business expert who provides tools, tips and advice to help small business owners be successful. O’Berry is the author of Small Business Cash Flow: Strategies for Making Your Business a Financial Success.” Her blog can be found at Just for Small Business.