— by Jacob Harper

Businesses usually go under for one of the following two reasons: the business is either out of capital, or it is going to run out of capital in the very, very near future.

As a business owner, making sure you and your company have money (or at least the ability to generate money someday) is the one true essential. Above all, you must possess the ability to maintain a cash flow to keep the doors open. Everything else is window dressing.

So how do you make sure you always have cash? By being more careful than the next guy.
Follow these steps to a sound cash flow projection and keep your business afloat—and your wooden barrel wardrobe in the closet for another year.

1. Make Eeyore look like a sunny optimist

An easy rule of business to follow when just starting out is this: “Pretend like you won’t sell anything for the first six months.”

But why, then, do so many businesses go under even more quickly than that? Because they had completely unrealistic expectations about what kind of money would be coming in. As a result, they were playing with money they didn’t have yet and similarly could not be certain they would get.

Be like A.A. Milne’s famous pessimist donkey, Eeyore, when it comes to your business practices. Assume the worst and hope for the best. Assume everyone in the world will avoid your business like the plague, at least initially. Or just assume sales might dip severely for no apparent reason.

For instance, at my old clothing venture we started making over-optimistic projections after a gangbusters first month of operations, forgetting about the whole “new business sheen” that would wear off after novelty waned. It nearly cost me my business. The next time there was an unexpected dip in sales, though, we were ready to take a hit.

2. Budget for the occasional, unexpected, life-path altering catastrophe

While budgeting for bad times is generally good management, budgeting for catastrophe is even more important. These are the big hits: a sudden bedbug infestation that hits right before Black Friday; a flood that somehow skirts your insurance policy; an employee who has embezzled their way into a palatial estate located in a country with lax extradition laws. You know—the really bad stuff.

Rainy day funds are not an optional expense. You need to set aside a large chunk (a couple-few months operating budget) so you can weather an unforeseen catastrophe. Otherwise, you’re always one virile bedbug bite away from shutting your doors. While building this set-aside fund can be painful, especially if you’re barely on your feet to begin with, being without reserves is not an option.

3. No business is an island: follow the economy

Yes, we know, the economy is bad right now. Really bad. But even though we are in a valley these days, the week-to-week, month-to-month, quarter-to-quarter blips are essential to track. Consumer spending really does change quickly, and you as a business owner can stay up on it if you pay attention. You can study harder than the next guy, anticipating how and when your customers will spend and what kinds of goods and services they are and will be seeking. But to do so, you need to stay informed. And temper your projections in line with what is happening in the world around you. The EconomistBloomberg and Slate’s Business section are good places to start.

4. Consult outsiders…professional outsiders

But you don’t need to do all this yourself. When making realistic cash flow projections get help from a professional (unless you’re an accountant, and even then…it almost never hurts to get another opinion.)

“Professional” does not mean enlisting a family member to manage your finances. Find a strong, real life impartial arbiter, someone who won’t be afraid to call you a loon when you project making millions in building a Scrooge McDuck coin pool by year’s end.

A good accountant is like your business’ mechanic: someone who can take one look at the books and call out what needs to be tweaked, repaired or flat out scrapped. While you might be a special snowflake who makes the best business decisions in the world, you can never underestimate the importance of fresh, well-trained eyes on your cash flow projections.


Jacob Harper co-founded Vintage Vice, a clothing store and apparel brand, in 2006 when he was 23. After selling Vintage Vice in 2009, he has been writing and teaching. He is currently a head writer on the weekly political sketch show Top Story! Weekly at the iO West in Hollywood.