Two of the most important aspects of of owning a small business is to keep personal spending and business spending separate, and the life line of your business is a healthy cash flow.
Cash-flow management and planning has helped keep my small cleaning business profitable every year since it opened in 2009.
Keeping on top of cash entering and leaving a business is the most basic yet crucial aspect of cash-flow success, but it’s often overlooked by many small businesses owners.
Most business owners wait until the end of the year to find out whether they are making money.There’s one problem though – Waiting until the end of the year is simply not good enough, because fixing problems at the end of the year is simply the wrong way of running a business, and instead problems need to be addressed along the way. And when year end arrives, there’s no worry on whether the business made money, lost it or broke even.
Liquidity is important to maintain the day-to-day operations. Your employees need to be paid, you need to pay your self, and new stock needs to be ordered, and without liquidity it’s a tough stretch.
Here are six common cash-flow errors and a few suggestions on how to avoid or fix them:
1. Not Paying Yourself
Often small business owners forget to pay them selves first, and if we think back to personal finance 101, the first basic aspect is paying your self first. Include a reasonable living wage for yourself in business and cash-flow planning. Planning ahead is essential, and if you go into a personal cash-flow crisis and need to pull cash out of the business, you’ve also created a business cash-flow crisis. That’s why you need to plan accordingly, so that you’re ready at the time of crisis.
2. Mismanaging Credit
How many times have you heard of a small business owner with maxed out credit? I’ve heard and know a few of them personally. They started their business, applied for credit (line of credit or credit-card), and a few months later the credit is maxed out because they went on a shopping spree.
As a small business owner you need to prearrange credit (such as lines of credit or cards) through financial institutions before you need it. You want to be proactive – if your cash flow is tight and you’re experiencing challenges, it will be more difficult for you to go to a bank and get it at the time when you need it the most. If using credit to defer cash outflow, ensure it’s paid back before high interest rates kick in – typically most business credit cards have a 21 day grace period.
Finally, please please please don’t make personal purchases with your business credit. Keep business and personal expenses separate or you’ll end up upside-down with personal and business debt.
3. No Reliable Cash Flow or Tracking System
Use special accounting software and online interactive tools that can help in cash-flow tracking and forecasting (i.e., what is likely to happen to a business over a day, month or year). For receivables, for instance, programs and online tools can send electronic invoices to clients with a link to a portal where bills can be paid online. If you have a company’s accountant, he or she should be providing the owner with information regularly. No information means no cash-flow management.
4. Neglecting the Bills
Just as much as you enjoy getting paid on time, so does everybody else. So, pay your taxes, suppliers, utilities and other bills on time to avoid interest charges and a bad reputation in the industry. Every supplier is different with their terms, some will give you 15 days, others 7 days, and some (very few these days) will give you 30 day terms. Use online programs to keep tabs for you on the due dates or possibly even setup pending payments.
Many companies are offering early-payment discounts, and why isn’t it worth while to get 5-10% knocked off your invoice for paying on time. If you can’t make a payment on time, have that conversation with vendors and let them know your situation, you’ll be amazed at how receptive people are to honesty, and making alternate arrangements.
5. Stagnant Growth
If your company is experiencing significant sales or expansion, update your cash-flow plan and projections to take the implications of growth into account. Businesses find cash flow comes under the biggest demand in rapid growth situations, which means you have to start funding more inventory, more receivables, higher expense levels. Experts say rapidly growing businesses can also benefit from hiring a special adviser, such as a chartered accountant, to aid in growth planning.
Being a small business owner online and offline requires tremendous planning, and money management. One aspect that always stuck with me was to keep my personal and business purchases separate. If you do this, you’re already half way there, and for those of you still trying to become effective at this, starting doing so now before it’s too late.
What were some of you money management mistakes? How did you handle them?
Photo Credit (kenfagerdotcom)