What I’m about to share is real.  The names have been deleted to protect the stupid.

BillyJoeJimBob started his 1st eBay company selling flatbed scanners.  He had never owned his own business before, but he read a book or two once about businesses so he felt he knew enough.

A coworker was making a killing selling stuff online and BillyJoeJimBob thought he’d take a crack at it.  So he started posting ads for products to sell online.  He didn’t actually own the products, he found an online store that sold products dirt cheap, so he would just markup the cost of the product, the eBay item would sell and BillyJoeJimBob would get his money.  As soon as he got his money, he would then order the product and direct ship it to the customer.  The profit was spent on eating out, new computer games, DVD’s, everything thing that BillyJoeJimBob wanted but until then couldn’t afford.

The party ended quickly.  A customer sent an email saying they were about to leave the country for a business trip and had bought the scanner as a gift for their brother; could BillyJoeJimBob just ship the scanner to the brother instead?  Trying to be helpful, BillyJoeJimBob agreed, and paid for the scanner to be shipped to the brother.  Two days later, the customer filed a dispute saying that they never ordered the product and said it was a case of fraud.  The funds were returned.

Since BillyJoeJimBob didn’t have enough cash in his PayPal account, the funds were directly taken from his bank account.  Never one to be ready for a rainy day, that fund transfer wiped out all of BillyJoeJimBob’s bank account.  BillyJoeJimBob called PayPal, but there was nothing they could do.  You see, by shipping to the “brother’s” address, it wasn’t a verified PayPal address so there was no seller’s protection.  Soured on the whole deal, BillyJoeJimBob stopped selling on eBay.

This happened to one of my buddies, someone I’ve known since grade school.  He broke a cardinal rule of business: he didn’t have control of his cashflow.

Profit and cashflow are two totally different things.  Profit is excess cash left over after expenses are paid.  Cashflow is actual cash on hand.  Cashflow doesn’t take into account the debts you have or bills you have to pay.

Cashflow management is one of the main reasons most businesses fail within 5 years.  If the business is successful, it’s difficult for the owner to keep their hands out of the cookie jar of cashflow.  They have access to all this money, why shouldn’t they use some of it?  It’s theirs after all.

Entire books have been written about cashflow management.  Here are a few important points to follow:

• Keep a cash reserve on-hand.  Keeping a rainy day fund handy will save your butt if an unforeseen expense rears its ugly head.  A good guideline I follow is to have enough cash on-hand to be able to give refunds to every customer within the past 30 days.
• Pay operational costs promptly.  It’s your business operations that bring the income.  If you can’t afford to keep current operations running, then everything will grind to a halt and no more income.
• Don’t think about taking a salary.  After all expenses are taken care of and the cash reserve is fully funded, invest your PROFITS (yes, it’s profit at this point) back into the business.  Expand the business to make MORE money. 

Cashflow management isn’t fun or exciting.  Most of the time, it’s frustrating and stressful.  Managing the cashflow of the business helps determine the strategy and direction of the business.  Follow a conservative course, and your business will grow.  Spend the cash like BillyJoeJimBob, and you will fail.

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