In my book Mistakes: Avoiding the Wrong Decisions That Will Close Your Small Business I addressed the problem of running out of cash. Although our company had a good amount of money in accounts receivable, during the 2008 recession it became harder to collect that money. Many people simply did not have the money to pay. Accounts that used to be paid within 30 days often stretched to 60, 90 or even longer. I had failed to keep sufficient cash on hand to keep our own obligations current.
Some weeks we had to choose between paying our employees and paying our vendors and other creditors. For me, the employees would always be paid first, but that meant that we kept getting further and further behind with some of our suppliers. Some of them put us on COD which further strained our cash flow. This lack of cash became a constant source of stress that did not go away until we sold the business and all its assets and was able to pay our creditors.
In a small business cash is king. With cash in hand you can do anything. Without cash you are severely limited. With cash you can often negotiate good deals with your suppliers. Without cash you are at their mercy, and as I found out, many of them are quite unmerciful. No creditor is interested in how much money you have coming in. They are only concerned that their bill is paid on time. It makes for some very unpleasant telephone calls.
If I started a business again I would have six months of expenses set aside in retained earnings. I would also make sure that we had a healthy cash flow. Depending on the type of business that would require that most, if not all, the products and/or services would be paid for at the time they were provided. In the previous business we issued too much credit to individual homeowners, a mistake I would not make again. With six months of expenses in retained earnings and a strong positive cash flow, insufficient cash should not be a problem.
To read more about the importance of cash and the other mistakes I made operating that business I invite you to read the book. If you just avoid one of the mistakes I made it will save you far more than the $4.95 the book costs.