Undercapitalization can kill a business. Fast. There’s nothing like running out of money.

Try paying bills, buying supplies or meeting payroll with promises instead of cash. And if you think that’s difficult, try expanding your business without adequate capital.

Positive cash flow—more money coming in than going out—is the measure of capitalization. You may have assets, but unless they translate to cash flow, they don’t do you much good in meeting expenses.

For prudent management, formulate reliable short- and long-term cash-flow projections. Your ability to anticipate weekly, monthly, annual and multi-year cash flow aids in managing your money and heading off disasters.

Also, track cash flow to know where your money went so you can readjust projections for otherwise unanticipated spurts and sputters.

When identifying capital sources, include:

• Your own investments
• Sales revenue
• Funds borrowed against assets and accounts receivable
• Reserves
• Outside investors

It’s important to note that borrowed money improves cash flow, but the loan payments deplete it. Moreover, payments continue for the term of the loan, whereas the injection of borrowed cash may be a one-time event, or a limited duration.

Borrowing to pay off an existing debt or to meet payroll relieves cash flow only at that moment in time. But assuming the loan means monthly payments on principle and interest continue.

Nevertheless, borrowing against assets also can improve long-term cash flow. If you assume a debt with a small payment, you might invest in new equipment to generate new profits that more than offset the payments.

Be aware that financial formulas that worked for your business in the start-up stage may not work for your business in its mature years. Keep tabs each year and adjust accordingly.