“Making more money will not solve your cash flow. Management is your problem” Robert Kiyosaki (author Rich Dad, Poor Dad)
Cash is king. Let’s be honest, making money, cash, the big bucks are one of the main reasons why you started your business. Yet so many business’s fail within the first year due to cash flow problems. Don’t let this be you!
Cash flow is the term used to describe the amount of money being transferred into and out of a business. Sounds simple enough. So why is this so difficult for companies to get a handle on? In two words, Poor Management.
Just as increasing sales is vital to your company’s success, so too is learning to manage your cash flow. Here are some solutions that every struggling business should apply to make their cash flow problems disappear.
- Clean up your books
Putting off your bookkeeping is tempting. You are not an accountant, you were abducted by aliens or you are too busy. Whatever your excuse is to avoid this vital function is, leaving your bookkeeping until it is time to file taxes is a No No!
If you find yourself falling behind on payments this may be a red flag. Do your books! If you can’t find the time, hire a professional. For most business’s, the only real way to get the books in order is to use an accounting system and make a point of keeping it up to date.
Our motto at Thinkbooks is “Good Books Are Good Business” and it is something we encourage our clients to put into practice.
- Bad Debts
Bad debts are amounts owed by customers that cannot be recovered. They can be extremely damaging for a new business.
Early in the building of your company, it is encouraged to establish a credit control system whereby procedures are in place to help you collect money owed to you. This could be as simple as setting aside time each week to send out reminder emails/letters, or even passing the account to a debt recovery firm. The point is to not let things go. Don’t sit and wait. Patience is a virtue but not when a customer owes you $50K.
To reduce the chances of bad debt, some business’s conduct credit checks on their costumers before offering them credit. If they have poor credit, then you may want to ask for a deposit up front or issue partial invoices they can pay as portions of the work is completed.
- Keep it, Don’t Spend it
One of the most common things we hear from clients are excuses (often valid ones) for spending. The problem is they have misplaced priorities. Is that fancy office furniture necessary? Do you need a personal assistant to run your errands? Is staying at 5-star hotels while traveling on business going to make the difference in whether you make the sale or not? Highly unlikely. Think before you spend!
Consider reducing your business’s biggest expense. Payroll. The reality is that when earnings fall below a certain point, cutting staff will be the main way that outgoing cash flow can be stemmed.
Just because you are making money doesn’t mean you should be spending it. Which brings us to our next point;
- Learn to predict the future
A business owners crystal ball is his/her books. Cash flow forecasting is essential in any business. To accurately do cash flow forecasting your bookkeeping needs to be up to date. From your books you then can create a cash flow forecast that will help you see which months you can expect to see a deficit and which months you can expect a surplus.
Forecasting will also give you a good idea of how much money your business is going to require over the next year or so to survive. Knowing where you stand helps when you need to make important decisions such as when to make a capital expenditure or whether to cut an expense.
- The Taxman is real
The Taxman cometh. It is not uncommon for business owners to get caught up in how much money they think they are making. In the first year of running your company all you can see is how much money comes in and if you are smart, how much goes out. But we hear it all the time “I owe how much?”.
Don’t forget that you must pay taxes! There is no avoiding it. And sometimes the amount shocks the life out of you. We tell our clients to always account for that dreaded tax filing. Which is why forecasting is so important, it reminds you that the $10k you thought you had in savings may actually belong to the Taxman!
- Your Pricing Is Off
Most business’s set their prices when the business is new growing. As a result, prices may be set low to attract customers. Over time, nominal increases may occur but rarely does the owner ever sit down and rethink the pricing model.
Paying close attention to your gross profit margins, including breaking it down by client, product or service category will give you a better understanding of how much of a price increase is necessary. Have your accountant run the numbers for you if you are unsure.
These are just a few ways to avoid cash flow issues, especially if you are a new company. It is recommended that you meet with your accountant every quarter to go over your financial statements and cash flow forecasts so that you can have a better understanding of your company’s financial health.