The lifeline of any business is a healthy cash flow. Too often, even large corporations ‘go under’ when they can’t make payroll, pay vendors, or even the taxes that are due. Many factors are involved, but 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.
Too many business owners wait until the end of the year to find out if they are making money. Waiting until the end of the year is a guaranteed disaster; problems need to be addressed along the way so that there is no question as to whether the business made money, lost it or broke even.
Positive cash flow (liquidity) is important to maintain your day-to-day operations. Your employees need to be paid, you need to pay yourself, new supplies and equipment needs to be ordered, government want its share, 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 themselves first. Yes, as a startup business, especially on a part-time business, taking money out may need to be deferred. 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 who over used his credit? 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. (Had to have the new office furniture and company car!)
I am a firm believer in NOT using credit to build a business. If using credit to prevent cash outflow, ensure it’s paid back before today’s high interest rates kick in – typically most business credit cards have a 21 day grace period. Finally, 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
At a minimum, use a spreadsheet or accounting software 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). If you have a company accountant or part-time bookkeeper, 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 late charges. Take advantage of early-payment discounts to get 3% 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. Rapid 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 labor costs, etc.
Being a small business owner requires planning and money management.