When running a small business, it is imperative that you are constantly aware of your company’s cash flow. What is cash flow? Cash flow is that amount of money that you really have, available and on hand, right now. It is especially important to keep this in mind when you are considering taking on a large contract. Big contracts are wonderful opportunities and can bring your small business to the next level, but they are fraught with danger as well.
When the potential to seize a big contract arises, it can be easy to have eyes that are bigger than your stomach. Many small businesses leap at the chance. They start hiring more workers, buying expensive resources in huge quantities, and take on a larger amount of responsibilities then they had dealt with before, which requires them to bring on expensive specialists and lawyers. And, because they were not keeping a careful eye on their cash flow, they find out too late that they have bitten off more than they can chew. How does this happen?
A common mistake is that the small business owner refers to their profit-and-loss statement, rather than their cash flow. Your P&L, also known as your income statement, is quite simply not an accurate report of your available funds. This is primarily due to the fact that it counts owed income in it’s final balance for the period of time being considered. If you closed an order for 1,500 dollars, it will be counted in your P&L, even if you have not received payment yet. When you take on a large project and assume you have cash in the bank that simply is not there yet, for whatever reason, you can find yourself in serious trouble. Checks will begin to bounce, workers may have to be laid off, and the big contract is going to languish and fall behind schedule. In the worst case scenario, you might end up losing the contract and all the money you’ve sunk into the project, as well as seriously damaging your reputation. For many small businesses, that is a wound that they simply cannot recover from.
Before you get involved in a big contract, please, make sure your business can afford it. Know your cash flow.