Managing Cash Flow: How One Small Business Owner Does It

When you’re a business owner, you see cash flow the way any other person sees food: it’s your fuel for energy, your nutrition for health and strength, and your comfort when things get hard. 

As a small business owner myself, I personally take a look at my cash flow every day to ensure I have what I need to pay salaries, rent, inventory, interest payments, new gear, taxes, and whatever else comes up. It’s a relatively easy job for me because, as a digital service provider, I don’t have a ton of expenses. 

But what about business owners who do have a lot of expenses? How do their approaches to managing cash flow differ from mine?

To find out, I spoke with Jacqueline Vong, founder and president of Playology International—a strategic consultancy that specializes in making merchandise, toys, and apparel for creators. Playology’s clients include children’s entertainers from The Wiggles and Elf on the Shelf to small start-up properties that show promise. Cash flow is essential.

Your business makes a lot of merchandise – but that must cost you a lot of money. Do you front the money to make the product and then sell it in hopes of making more than you spent?

Generally, that’s how most entrepreneurs in my position would operate, but I’ve taken a different approach. I try to collect the hard costs up front from clients if I can, either through a loan or by having trusting clients who’ll front the production. If I can’t do that, I can try pre-selling a product — kind of like what happens on Kickstarter. In a case like that, I’d let my client’s customer base know what my client is planning to offer before we build it. This is a great way to mitigate risk: by generating hype for the product, having people pre-order it, we’d then have some capital to go into production. Then anything we sell once the product is launched and after those pre-orders are filled is stress-free gravy. Pre-selling also takes our inventory costs to zero, which is very helpful for maintaining cash flow.

That’s a lot of moving pieces and sounds like a lot of money going in and out. What do you do daily to make sure you have money when you need it? 

Generally speaking, I’d say the thing I do most religiously is make a spending projection and forecast at the outset, and keep updating it as needed so I always know what I’m going to be spending and what I need to retain so I can do it. We would do a 30-60-90 day forecast plan and then a 1- to 2-year projection. I would usually make a shared document with the client and potentially the manufacturer so they can update stock production quantities, ship date, payment due dates, etc.

The problem I’ve had recently with the pandemic is that forecasting is all over the map and can change daily. In the past, prices may change 5% to 10% over a year. A few months ago, some of my shipping vendors increased their prices 50% overnight. And that wouldn’t be as bad if I was only working with one vendor. But if you think about a toy we’d produce, every element of that toy, from the disc in the motor to the googly eyes, is provided by a different vendor, all of whom are responding differently because of the pandemic. So, any forecast I make today could be useless tomorrow.

That must be very stressful. 

It is. That’s why—for both my stress levels and my cash flow—I try to lock in prices as fast as I can. And I have to move fast. Before the pandemic I’d have at least a week to two weeks to consider a vendor price, do some comparison shopping and make the best decision. Today, every vendor wants commitments much faster. Some give us 12 hours for a go/no-go.

But despite the realities of the day, you’d still recommend accurate forecasting as a must-do for keeping an eye on cashflow?

For sure.

What else would you recommend?

I always set aside 10 to 20% of a month’s revenue to put into a slush fund for a rainy day because things happen.

Like a global pandemic…

Ha…yes…but other things happen too. A shipment is damaged and I have to do a recall. A customer goes bankrupt and can’t pay me. I find a can’t-miss person I have to pay big bucks to hire. Then there’s the cybercrime risk I’m exposed to as an eCommerce retailer and the product liability and safety insurance I’m on the hook for as a product manufacturer, both at the factory and customer levels. If any of these costs (or one of the many others I have) change, I know I have the cash flow to cover it.

When should someone start building that cash flow slush fund?

Right away. Save 10 cents from your first dollar of revenue and go from there.

Even if you can’t afford it?

You can always pay yourself less or take a smaller draw. Think of it as short-term pain for long-term gain. And then, to preserve cash flow, don’t give away money you can keep. For example, pay your taxes and bills on time so you don’t have to pay interest. That money’s better in your slush fund than someone else’s.

Have you ever been in a position where you didn’t have enough cash flow to pay your bills?

I’m lucky enough to say no to that, but I’ve been close. I was at a point where my runway—the number of days I could keep my business afloat without making a sale—was dwindling quickly, and I had to make the tough decision to either fold or pivot. I chose to pivot and now I’m making 3X what I was then.

Good for you! When you made that pivot, what did you have to think about from a cash-flow perspective?

We needed to take long, hard looks at head count and external expenses: Did we need a bookkeeper? What tech subscriptions could we forego while building up a new clientele? Stuff like that. The other big thing we did was evaluate our revenue generators to see which were profit centers and which were loss centers. Some of the products that generated a lot of money were actually not good for us during our pivot because they ate up too much cash flow with retail stocking fees and marketing fees and such.  There’s also human capital, which I had to take a long, hard look at—how many hours were going into what project. If you broke down the hours per client, which ones were revenue generating but efficient with the hours you spent on it.  

We parked the least efficient and pet projects until we had the money to revisit. That particular pivot is what led us into the consultancy world, which opened the door to some of the brands I’m working with now. 

Last question: What would you say to an aspiring entrepreneur who’s intimidated by talk of cash flow and finances—especially right-brained entrepreneurs who aren’t good with applied math?

I’d say two things. The first is that you don’t have to have a graduate economics degree to succeed in this area because a lot of it is common sense. What you do need is 100% visibility. You should always know what’s going on so you can make decisive money-spending decisions quickly. And two, if something isn’t making you money, don’t be afraid to change it. If you plan properly, your cash flow can handle a pivot. What it can’t handle is complacency. And the second thing is, I want to wish good luck and fortune to all the aspiring entrepreneurs out there. Despite the scattered nightmares, and the roller coaster ride, it really can be rewarding. 

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.