Small Business Cash Flow

Strategies for Making Your Business a Financial Success

Denise O'Berry

• Publisher: Wiley
• Year: 2010
• ISBN:
  9781118044650
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Pequeñas empresas

Many small business owners don't understand the importance of maintaining a healthy cash flow. More than anything else, cash flow determines the success or failure of a small business. Small Business Cash Flow covers all the basics of cash flow, from selecting a great accountant, to keeping money flowing in and out of the business, to budgeting and record-keeping.

CHAPTER 1

Understanding Cash Flow—Your Number-One Priority

A small business owner is working 80 hours a week and he just discovered he doesn’t have enough money in the bank to pay this month’s bills. That’s a story repeated time and again in small businesses around the United States every single day.

Small business owners like you work your fingers to the bone, negotiate the best deals for a huge profit, and have no cash to show for it. It’s not ignorance; it’s just a misunderstanding of the simple steps that must be taken to ensure your business is the success you visualized.

You may be making big profits on the products or services you sell, but that doesn’t mean you’re in good shape. It’s a good thing to have profit in your business, but most important is having cash. Profits don’t equal cash. At any given time your profits can be tied up in inventory or accounts receivable and could be completely inaccessible to you. What really counts in your business is having cash on hand so you can take advantage of opportunities to expand your business and deal with emergencies as they arise.

It’s essential that you understand how cash flow works in your business so you don’t end up sending it in the wrong direction. The basics of cash flow include a few simple items. Cash coming into your business is called revenue, income, or sales. These all mean the same thing. Cash going out of your business is called expenses. These are the bills you have to pay to operate your business like your rent and telephone. You probably already know that income minus expenses equals profit, but what you may not be aware of is that you can’t count on that profit to run your business. Assets are the things that your business owns. You probably have a computer. That would be considered an asset. Any invoices you’ve issued but have not received payment for are also assets. Your company also has liabilities. These are bills that you owe to someone else; money you owe on any credit cards, bank loans, or outstanding bills. Assets minus liabilities equals equity. This is what your business actually owns. If you financed that computer and have paid 50 percent of the bill, you own half of the computer.

So how do you get a handle on what shape your business is in from a cash flow perspective? For starters, you need a good record keeping system. There are plenty of options for accounting software available to small businesses, but that’s not a requirement. If you’re more comfortable keeping your records manually, that’s fine, too.

In your record keeping system, what’s important is knowing how much money people owe you, how much money you owe, and your cash on hand balance. You also need to know the rolled up totals of your income and expenses for each month and year. Financial tracking and reporting is not a once a year event aligned with the ritual of doing your taxes. Businesses that are successful know their financial position and track it on a regular basis. Businesses that aren’t successful don’t. Without fail this has held true in my experience working with small business owners over the years. You simply must know where your business is from a financial perspective.

If you’re having cash flow problems, they more than likely stem from one of four key areas.

1. Your sales aren’t high enough.

2. You’re not collecting money people owe you.

3. You’re not charging enough to cover expenses.

4. You’re spending too much money running your business.

Any of those look familiar? Sometimes cash flow problems in a small business can be attributed to just one of those items. More often, it’s a combination. One thing’s for sure. If you don’t step back and take a look at each of these items, you’ll never know where the problems lie.

WHAT’S THE PROBLEM?

You need to take a systematic approach to each one to find the problem and take action to correct it.

Your Sales Aren’t High Enough

The best way to get more sales is to get more customers or sell more to the customers you currently have. The only way to do that is by using a consistent marketing strategy that targets the right people for your product or service. You absolutely must have a marketing strategy for your business and a tracking system that tells you what’s working and what’s not. There are numerous ways to market your business and increase your sales. How you do that depends on your business services and the customer you are targeting.

You’re Not Collecting What People Owe You

It’s really easy to get so caught up in the work of your business that you forget to bill for your services or forget to track what you’re owed. But the simple truth is you must. Your survival depends on it. If you do work and don’t get paid, what have you gained? Nothing except a bunch of lost hours. You don’t have time for that. You simply must have systems in place for making sure you get what is due to you.

You’re Not Charging Enough to Cover Expenses

One thing a small business cannot do is compete on price. Just ask all those small business owners who tried to compete on price with Wal-Mart. You don’t have the same buying power as the giants. What you do have is the capability to appeal to a different segment of the market by making sure you offer extra value for the price they pay. That way you can calculate your price to make sure each and every expense is covered with some left over for your good work.

You’re Spending Too Much Money Running Your Business

Running your business isn’t all about paying bills. How your business operates contributes in a big way to what you end up with as your bottom line. Whether you have employees or outsource some of your work to contractors, how that work gets done can make the difference between profit and loss. How and when you spend your money has a big impact, too. You can’t afford to spend haphazardly, not knowing from one day to the next how it will impact your bottom line. You may be flush with cash one month and not have enough the next. Knowing in advance when that will happen will enable your success.

IT’S ALL ABOUT ACTION

Knowledge alone won’t change your business. Action will. You may be able to correct your direction and restart your business on the right course. But my suggestion is don’t go it alone. There’s plenty of help available for small business owners in the form of experts and information to improve your cash flow. The main thing you have to do is get started. You’ve taken the first step by purchasing this book. Now all you have to do is put the ideas into action. Let’s do it, shall we?

CHAPTER 2

Your Business Partner—The Accountant

The life of a small business owner can be a lonely one. Juggling a million things at once to keep your business on a successful track is no easy feat. Add making sure the government is happy and you could end up with a bunch of sleepless nights. So why spend them alone? An accountant can be your best business advocate and your connection to sanity in a world of craziness. But you must select your accountant wisely. A mismatch can be your worst nightmare.

I’m a perfect example. During my first three years in business, I blazed through three different accountants. What a waste of time and money. I don’t even remember how I found the first one though it was probably through the suggestion of a business colleague. I realized after about three months it wasn’t the right fit for me and started looking around. I thought I did it right the second time. All was well until that accountant decided to sell out to someone else and never bothered to tell her clients. The person who took over was a very clear mismatch. After that a little legwork proved prudent and my current accountant has been with my company for about seven years. If you spend some time going through the process outlined in this chapter, you can avoid the headaches I encountered.

The good news is that technology provides you with plenty of options for finding and working with an accountant. But that’s the bad news, too. There are so many choices; it can be tough to narrow them down. Services can range from completely virtual to totally hands-on.

Suzette Flemming of Flemming Business Services Inc. says 90 percent of her clients are 800 or more miles away from her physical location, yet she can enter and process all of their paperwork, monitor accounts for red flags, and provide weekly and monthly reports. For many clients, she will download data directly from online accounts. All without ever meeting them face-to-face. Having this kind of business arrangement with your accountant requires a high level of trust and comfort with today’s available technology.

However, that’s not a good arrangement for Stephanie Chandler, owner of Book Lovers Café, who likes to keep a little closer tabs on her financial matters even though she hates dealing with the paper. Chandler maintains a spreadsheet so she can keep an eye on daily sales. She has an onsite bookkeeper and a local accounting firm that takes care of the other details. Once a month she gets financial reports so she can be informed about what’s going on.

Your choice of business arrangement may be similar to these examples or somewhere in between. Let’s figure it out.

SEARCHING FOR YOUR ACCOUNTANT

What Do You Want?

Since you’ve decided it’s time to hire an accountant, that decision will be the easiest part of your selection process. This is one choice you don’t want to make by picking a name from the biggest ad in the yellow pages. So where do you start? With yourself. You can’t hire an accountant until you know what you’re looking for. That means you need to take the time to think through your requirements before you make the first call. Take a few minutes to answer the following questions before you proceed. You will find this Requirements Worksheet in Chapter 9.

Requirements Worksheet. Answer each question with a simple yes or no.

1. I’m comfortable having a business discussion via e-mail.

2. I’d rather have business discussions on the phone.

3. I’m more comfortable if I can be face-to-face with someone during a business discussion.

4. I’m on top of my tax situation and fully aware of my obligations.

5. I’d rather not learn the ins and outs of the tax code; someone else can do that for me.

6. I hate organizing the financial papers that come with owning a business.

7. I get a lot of satisfaction from sorting through monthly receipts and tracking how they impact my business.

8. I prefer working with a large firm.

9. I’d rather do business with a small specialized firm.

10. I could benefit from having a partner who can connect me to other business opportunities.

11. I like to bounce business growth ideas off an expert.

12. I’m willing to dedicate cash resources to get the results I need.

Let’s take a look at what you said to help you decide where to start looking for an accountant and what type of firm you’ll select.

Geographical Proximity. If you answered questions 1 and 2 with a yes, that means you are open to the possibility of having an accountant who may not be in the same city as you. Your comfort level with technology as a communication tool can be an asset you will put to work for you once you’ve made your selection. If you simply must have your discussions face-to-face, you’ll need to limit your search to your local area.

Service Level. A yes answer to question 4 indicates you may not need to hire a full-time accountant as long as you’re willing to use your time for tax issues. You may be comfortable with someone who provides minimal direction and support of the activities you complete. On the other hand, if just thinking about all the reporting requirements and tax regulations makes you sick to your stomach, you’ll need to consider someone who can take on those responsibilities for you.

Paper Handling. Some people just love taking all the invoices, sales, and expense receipts and making sense of them. But most people don’t. A yes to question 6 means you will need to seek out an accountant who can complete those details for you.

Business Size. There are a variety of accounting firms, from small independents to huge companies with hundreds of employees. If you often feel lost in the crowd when working with large firms, then your best choice would be a small or mid-sized company. Although larger firms have a wider breadth of knowledge, it’s tough to establish a personal relationship with the people in the firm who may be handling your account. Sheer turnover ca...