From the course: Finance Essentials for Small Business

Managing cash on the beach

From the course: Finance Essentials for Small Business

Managing cash on the beach

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- I have a friend who's a small business owner. Let's talk about his cash flow management practices. I will the disguise the actual nature of his business to preserve his privacy. - So, what is the nature of his cash flow management issues? - He operates, let's say, a beach-side shop in a vacation beach area. He sells food, souvenirs and some groceries. He also rents jet skis and scooters. - Well, I bet his business is very seasonal. High business in the late spring and summer and almost no business in the winter. - Exactly, he tells me that he maintains a rolling 30-day cash flow projection. He forecasts how much cash he will collect from customers and how much cash he will have to pay to suppliers for each day for the next 30 days. - So has he ever had a big crisis that threatened his survival? - Yes, a few years ago. It was rumored that one of the big cruise lines would begin using his harbor as a stopping point. Of course, this would dramatically increase customer traffic. - Well I bet a lot of new competitors materialized. - Exactly, my friend said that new business owners came in, built or rented large store locations, filled them up with inventory and purchase large collections of scooters and jet skis, a lot of money was invested in the area. - So what happened? - Well the rumors turned out to be completely false. No cruise lines came to the harbor. - Ah, I can imagine the problems. Without sizable cash inflow from cruise line passengers, these new competitors wouldn't be able to maintain their cash payments for rent, inventory, wages and so forth. So how'd your friend do? - He did great. Throughout the excitement, he just calmly proceeded with his normal business practice of constantly balancing his expected cash collections and expected cash payments for the next 30 days. Because he carefully monitored his cash flow, he was able to safely ride out the bubble and the subsequent crash. - So how'd he do after the crash? - He actually made quite a bit of money, buying up the scooters and store inventory from his bankrupt competitors, the competitors who had not carefully planned and balanced their cash flows.

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