If I had a nickel for all the times I have heard this, well…, I probably would not be rich but I could have started a nice college fund for the kids.
Cash flow/management is a daily challenge for many small business owners. All types of companies are vulnerable to cash related problems and growing companies are no exception as they hire staff and/or buy more goods to sell.
Here are just a few quick thoughts on controlling your cash -
Reports and Projections – Keep your accounting records current and forecast cash inflows and outflows for the week, month, and year ahead to help you recognize the gaps, peaks, and valleys of the business cycle. Seasonal business know all to well about cash flow ups and downs but good planning can help most businesses be more prepared. And, don’t be rosy in your projection, stay on the conservative side and estimate inflows low and outflows high. Remember that a business can have a profit but still not have cash!
Control spending – Consider how you spend money…ask yourself if the item you are buying is going to provide a return on investment. Try to maximize value when it makes sense, i.e., sales, volume discounts, free shipping offers, etc. Try to get high mileage out of what you use and take excellent care of your stuff. And, if you are a new business, don’t fall victim to the spending frenzy, be conservative, look for used items to furnish offices, shops and warehouses.
Inventory - Stock what is needed to run the business in the short-term. Monitor regularly and try to maximize inventory turnover. Watch for theft!
Employees can be an expense or investment – Which do you have? Try to do more with less. Motivation is critical and studies have shown that money alone is not what keeps an employee happy. Consider using temporary help from staffing companies and independent contractors. Leverage professionals. Live the motto, slow to hire, fast to fire. Be wary of high fixed costs and consider incentive compensation. And, monitor your employees or you may be sorry. Try not to delegate authority to sign checks or purchase orders.
Lease vs. Buy – Leasing could save you from large down payments and larger monthly payments but could be more costly in the long run. However, consider that buying may provide a larger tax deduction currently. Wear and tear concerns are important considerations to and should be a part of this analysis.
Minimize owner living expenses in advance – While getting started, plan not to have more then a minimum income. If you cannot afford this for a year, consider if being an entrepreneur is right for you. Business entity choice may be a factor in choosing your compensation. But, keep in mind that there can be more than just income taxes to pay. Don’t overlook the non-refundable costs of Social Security and Medicare… Try to keep your pay low within reason. If your pay is putting the company into a loss or negative cash flow, seek help immediately from a professional.
Collect receivables and extend payables – Your cash conversion cycle is critical, try to collect your revenue as soon as possible and get terms with vendors. Consider discounts to get customers to pay sooner and late fees or interest for late payers. Develop and implement a strong credit policy and don’t be afraid to use it. Negotiate and use vendor discounts.
Re-Purposing and Re-Selling – Try to reuse and recycle anything and everything. Or, sell it before its value goes down even further. If you receive your goods on pallets, try to sell them for a dollar each, even give them away so you do not have disposal costs. Office and shop equipment and supplies may have multiple lives, i.e., an office computer can become the shop computer. When the shop is done with it, give it to the employee that was using it to increase motivation.
Be prepared for shortfalls – What can you do now to get prepared for cash flow challenges? If sales were terrible for a month, do you have a line of credit or cash reserve to cover your working capital needs? What is your credit score, could you borrow more if you need to? Do you have the right bank and relationship? Can you or are you going to fund the entity with personal cash? Do you know what your business is really worth? Do you know your breakeven point?
Taxes – Be prepared to pay taxes on any income you earn. Don’t use trust fund taxes like sales and employee taxes you collect to run your business, these moneys should be set aside for remittance to the proper taxing authorities.