No Wiggle Room: Many Companies Don’t Keep Enough Cash

When Rafael Romis started his website design company five years ago, he kept enough cash on hand to last about two weeks. That worked well until the company's income taxes had to be paid.

"Even if you have a good amount in the bank, it's not really your money till you pay your taxes," says Romis, owner of Weberous Web Design. "At the end of the year, it disappeared and we started the new year completely strapped."

Romis, whose company is located in Los Angeles, had to use personal savings to restore Weberous' cash reserves.

"Cash is king" is an axiom business owners try to live by. If revenue isn't coming in, and owners can't get loans or investors, there's no way to run day-to-day operations, buy inventory and equipment or hire workers. But many companies struggle to maintain a healthy cash flow and create a buffer for an event like a storm that keeps customers home.

Companies with cash problems often have overestimated how much revenue they'd have and underestimated expenses, says George Solomon, a George Washington University management professor. It's especially a problem for new owners. These owners may also not be adequately prepared for the seasonality of their business, or for the slow payment practices of their customers -- particularly if the customer is a government.

"They can literally have millions of dollars on their book in terms of procurement (contracts) for the federal government and literally be filing for bankruptcy," Solomon says.

Businesses like restaurants with low profit margins are particularly at risk of running through their cash buffers, since any interruption to their revenue can put them in danger of closing. Massachusetts restaurants and retailers had a 50 percent drop in revenue between Jan. 26 and Feb. 22, 2015, as massive snowstorms hit the state, according to Boston University researchers. Hidden...

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