Studies have shown that as many as 82% of small businesses fail due to poor cash flow management. Let’s start with the textbook definition of cash flow “the total amount of money being transferred into and out of a business.” Honestly, it’s a simple concept, right? Keep cash flow up and bills down and you are set.
Cash flow management should be one of the first places an entrepreneur looks when there is a financial crisis within the business. All of this being said, let me share some tips, ideas and places to look for the answers to your cash flow woes.
So many small business owners are great at providing a service or producing a “widget” but lack the ability and/or drive to keep up with even the simplest book keeping tasks. Keeping up with the business books can be put off for only short periods of time before huge trouble sets in. So keep up with your business books a little every day or week to stay on top of looming cash flow issues.
#2 Over / Under estimating
I often notice new business owners that are so optimistic and tend to overestimate futures sales that they set themselves up for failure. Often times, inexperienced business owners don’t have the historic records to note slow seasons / months versus peak seasons / months.
On the other side, I’ve seen seasoned business owners under estimate costs when bidding and billing projects. For instance, a landscape design firm, we worked with, knew mulch cost $X per load in May but has been so busy running from job to job he hadn’t noticed each load increase by $Y per load. Now he has no way to recoup this loss. He under estimated or assumed and now has a deficit on several key projects. This kind of mistake can be hard to recover from for a seasonable business.
#3 Receivables Management
First, be sure your credit terms with vendors and client receivables are synched. If your vendor expects payments by the 15th and the client receivable isn’t due until the 20th what is your plan? For seasoned companies maybe you have a loan, a line of credit, factoring or merchant account to fall back on for the 5 days. However, startups or in some cases financially stressed companies these are not viable options. Instead, try talking with the vendor or offer the client a discount for paying early.
#4 The “it takes money to make money” mentality
Certain expenditures are necessary, however, some are not. First, know and recognize the difference between needs and wants. If the expenditure is directly related to garnering a profit then it is more than likely a need. If it will help but there is a less expensive option then maybe wait until profits are rolling in.
A great example is computer programs and apps. I see startups, at times, struggling. They want to start with the latest and greatest in technology but don’t have the capital to do so. They overspend before knowing when their first “paycheck” will arrive. Sure, we all want the latest and greatest but at times the free or “lite” version is just as good to make due for a few months until your company can generate a profit then upgrade to the full version.
#5 Budgets and Cushion
All companies should have budgets. I feel as though going into detail on this subject is redundant. All I will say is budget receivables as well as payables and know your overhead costs well.
All companies, in theory, should have some sort of cushion or “rainy day fund”. Said funds will help float slow times, make crucial repairs, budget overruns and unexpected costs.
These are just a few key examples of where to look. There are many areas you may need to involve your accountant in researching in order to get to the true root of the problem. No matter what the actual cash flow crisis is the sooner it is detected and corrected the better chance your company will have to celebrating each anniversary and milestone of success!
By Julie Harvatine, Director of Accounts at The Waterford Group USA. To learn more visit www.waterfordnow.com