Why is Cash Flow so Important

Cash flow basically means “Do I have enough cash in my bank account to cover my expenses?” Sounds stupidly simple, but you’d be surprised at how many people ignore this. You can have the most amazing service or product in the world, but if you run out of cash, it won’t matter. Read 37signal’s take on how to successfully manage cash flow, especially as it applies to entrepreneur’s starting their own web-based company.

  • Spend as little as possible. This is especially important in the early days of your business. Before you make any purchases over $50, ask yourself "Do I really need this?" If not, you can live without it.
  • Don’t buy hardware you don’t need. This goes along with the above rule, but it’s worth specifically mentioning. I used my crappy old PC and banged up CRT monitor until I was forced to replace it because it died. You don’t need that 23" Apple Cinema Display – trust me.
  • Be brutally realistic. Always overestimate your expenses and underestimate your income. Your cash flow should always be a ‘worst-case scenario’. If you know you can stay in business when things aren’t going well, then you know you’ll be dandy if the best-case scenario happens.
  • Chase invoices the minute they’re late. It may sound harsh, but the minute that an invoice is late, call the company and start pressuring them. If they think they can get away with late payment, then they’ll put you behind all the other customers they have to pay.
  • Update your cash flow regularly. As time goes on, you’ll realise that some of your predictions about income and expenses were wrong. When this happens, update those figures to make your cash flow realistic. I’d recommend updating your cash flow weekly. (…)
  • Cut expenses as much as possible. Have a hard look at the expenses column on your cash flow. Is there anything you can find a cheaper deal on? Anything in there that isn’t absolutely vital? (…)
  • People don’t always pay on time. When planning your cash flow, always account for the fact that it usually takes people longer to pay you than you think. Make sure that your cash flow doesn’t depend on certain invoices being paid on time. (…)