Cash is king!
Well in this case – “cash flow” is king.
It doesn’t matter how successful or what stage your business is in – it’s always a key aspect of operations.
In fact, a study from U.S. Bank found that as many as 82 percent of startups and small businesses fail due to poor cash-flow management. So, even if you’re a creative and talented entrepreneur in every other way, you must remain laser focused on your cash flow to avoid being a statistic.
From our experience, there are 5 typical cash-flow problems.
- Not conservative with sales forecasts
A positive attitude is a core trait of entrepreneurs. After all, what realistic person would start a company? While optimism is critical for running a business, letting it cloud your judgement can be dangerous to your cash flow.
it’s so important to complete objective and realistic sales forecasting based on historical evidence and real numbers. By using certain forecasting methods, you can use past revenue data from your own business or factual data from other businesses in your industry.
Forecasting is really difficult in your first couple years of business because you don’t have any historical data. We suggest master-minding or finding a mentor in your industry that is not directly a competitor.
No matter which method you select – be conservative and limit your downside risk over overestimation.
- Overspending
“It takes money to make money”: how many times have you heard that? Well it’s true. But, unfortunately, this belief can lead to many entrepreneur failing to overspending — especially in the first few months of business.
The reality is that while, yes, it does take money to make money, not all spending is created equal. Early stage
entrepreneurs tend to be excited and feel that business spending is going to get them closer to their goals. The truth is – the business world is a “only the strong survive” environment. Everyone is out to make money… including yours.
If you want your business to make money, then, keep your eye on the bottom line, considering the cost-benefit of every single expense. After all, every dollar you spend on your business is a dollar that is ultimately taken away from your profit margin.
We suggest you create a budget in advance and every time you are presented with an impulsive spending decision, look back to your budget and your financial goals.
- Managing receivables.
This is the fastest way to squeeze your cash flow. Business owners count on receiving revenues from unpaid invoices from clients. If you aren’t being proactive about collecting payments from your clients, you could be heading towards serious risk. Unpaid invoice tend to hit new businesses hard because they “bank” on the fact that these invoices will be paid and assume this money in their cash flow.
Sadly, businesses that don’t have policies, penalties and processes in place often get taken advantage of. If your clients don’t know for sure that they’ll hear from you the moment a payment is late, you’re sure to be the last of their vendors to get paid.
- Not using a cash-flow budget
Let’s assume you are setting realistic sales forecasts. You’ve tightened spending, and you’re being a stickler about
unpaid invoices. These three changes will give you powerful results in your cash flow. But you still have to track your day-to-day cash flow, otherwise, you could be very surprised.
For tourism companies, the months just before the travel are a time when cash flow can be particularly tight. You need more staff, more advertising and influx of sales, but if those payroll checks or advertising bills become due before your sales actually happen, you may have trouble paying bills on time. You probably already know this if you’re an experienced business owner… But, as the old saying goes “Knowing and doing are two different things”
The point is…
Make sure you are using a cash-flow statement so that you can track your inflow of revenue and outflow of expenses during specific time periods. This will help you anticipate when you’ll have more money going out than coming in, so you can plan ahead for those difficult periods (because all businesses have them.) Without one, you’re just guessing at whether you’ll have the money.
- Not keeping a cushion of cash on hand
No matter how smart or financially disciplined your business is, cash flow issues are simply a business reality. But, if you have savings on hand this doesn’t have to be an issue. But if your company is working from a zero account balance, one slow sales month could mean instant disaster.
We suggest keeping an account balance of at least 60 days of operational expenses. Keep in mind that most businesses don’t fail because of a lack of sales or a great idea, most often it’s not having cash on hand at the right time.
Cash-flow issues are one of the greatest challenges of business owners. It’s one of our greatest focus areas with our clients here at Park City Bookkeepers. If you are experiencing cash flow or bookkeeping issues, we invite you to schedule a free consultation on our contact page.