As advisors to businesses of all sizes, from basement tech start-ups to large manufacturing operations and including new businesses and mature generational businesses, our firm has seen time and again how businesses fail because they stopped managing cash flow.  An article in the Wall Street Journal recently discussed how a major retailer, Saks, has failed to manage their payments to vendors.  After courting a number of boutique small business to supply Saks with unique products, the retail giant has failed to make timely payments for the inventory it purchased and resold to its customers.  Several small businesses have learned a brutally hard lesson about the importance of cash flow.

Managing cash flow has many components, with these being the most common and critical:

• Adequate initial funding
• Collecting on receivables
• Making timely payments on payables
• Sticking to loan terms with lenders
• Keeping owner compensation at sustainable levels

When we see businesses struggle, it is typically because one of these elements has been ignored.  Let's expand briefly on each of the above: 

• Adequate initial funding - Often we see businesses launch on a great idea, but with vastly limited cash reserves.  Depending on the model, anywhere from 6 months to 12 months of cash reserves should be available at the outset.  New businesses will not have leverage with vendors or customers to get exceptions made.  Payroll can never be missed, nor can making payroll tax deposits.  We have seen businesses time and again make a conscious decision NOT to make payroll tax deposits with the Federal or State governments, which is typically the start of a death spiral.  If there isn't adequate cash to start the businesses before operating cash flow begins, don't start the business.
• Collecting on receivables - Far too many businesses are timid about collecting what is due to them.  Sadly, some of this is out of a displaced fear of potential client loss, but clients who will walk away from a business because they are required to pay their bills are not really clients a business should desire.  It is very important at the outset to establish a collection process with your clients.  Legitimate and respectable businesses will typically honor any reasonable process.  To lean on an old cliche, it is also important to avoid throwing good money after bad - don't continue to expose your business to bad customers by continuing to ship products or provide services.  Regularly review the business' receivables and manage the ones that are getting stale.  The excuse that "they always end up paying" is a poor business practice.  The reality is often that they may end up paying something just to string you along, but they will definitely stiff you with a large outstanding balance when they go out of business or change vendors.  While it is a thrill for small businesses to deal with the big players, don't lose your good business discipline just because you're dealing with a marquee client (see the Saks reference above).  Saks isn't the only big player to get fat off of the little businesses they feel they can shove around.   
• Making timely payments on payables - This is the flipside of the above discussion, and there is a little bit of the Golden Rule here - treat others they way you would like to be treated.  Stretching payables is an age-old business practice to enhance immediate cash flow, and can be tolerated within reason, but in the end it is a zero-sum game - current cash flow is being enhanced at the expense of future cash flow, unless the plan is to do this in perpetuity, which is no more than a cousin to a Ponzi scheme.  Most importantly, valuable time and entrepreneurial energy can be spent needlessly on managing creditors.  Stay on top of payables and spend your time growing the business.   
• Sticking to loan terms with lenders - Borrowed money is not your money - it's the lender's.  Banks will seem like they are your best friend during the courtship process, but banks, rightfully, expect a business to adhere to the repayment terms.  Only take on debt if you are confident cash flows will enable the business to repay it timely.  Tough times require that a business have frank and honest discussions with the lender; most lenders have some flexibility because they know that business can be unpredictable.  Be aware, however, that "banker fatigue" is a real thing.  Singing the same song over and over will get the business on a short do-not-lend list.  Banks are incredibly reluctant to foreclose or enforce the ultimate repayment terms, but they ultimately will, and that intervention to perfect their loans will be the death knell of the business.
• Keeping owner compensation at sustainable levels - Don't pull more cash from the business than the business can sustain. If anyone has to miss a payroll, let it be the owner.  Owners that establish a lifestyle that depends on pulling a certain amount of income from the business have no latitude when a downturn hits - and downturns always hit eventually.  Develop a discipline of taking a fair and reasonable amount of salary or draw from the business, but wait to take larger amounts until it is obvious that the business can afford the cash outflow.  Similarly, don't saddle the business with non-business obligations.  Keep your personal expenses in your personal account.  It takes far too much energy to play this silly and deceptive game of expensing personal items through the business. You'll regret you ever did when it comes time to sell your business, or when the IRS audit lottery draws your name.

We hope this reminds you of good business practices.  Most businesses don't do everything well.  Maybe you will recognize something you can do better by reading the above.  It is always a good time to improve your processes.