It’s a confusing concept, but small businesses often do not go out of business because they are losing money. Rather, they go out of business because their owners struggle with common cash flow problems and eventually run out of cash.
Think about it: sales are good, and you’re technically making money and increasing your profit margins, but if customers are slow to pay or you’ve had to invest in a new piece of equipment, cash can then be hard to come by.
Fortunately, there are things you can do to fend off potential cash flow problems and avoid poor cash flow management. So, how do you protect your small business from sliding into the kind of trouble that you may not recover from? Or, if you’re concerned that your small business has already reached this state, how do you fix it?
Start with these seven questions. If you’re able to answer the following questions and know with confidence that you’re handling things well, you have no reason to worry about cash flow. If, however, there are questions you realize you need to address, you must do so immediately.
1
You know the shoe box method of small business accounting: money in minus money out equals money left. It’s simple, and it makes sense. But it’s a poor indicator of your potential to run out of cash.
A business plan with sound and accurate record keeping gives you the ability to make smarter decisions for the future, especially when it comes to your cash. A smart small business owner takes advantage of this information to plot his or her next steps or their road to recovery. Make sure your information is up to date, because there is nothing more counterproductive than looking at last year’s statements to fix this year’s cash flow problems.
2
Failing to pay your payroll and sales taxes on time has painful consequences from a business cash flow perspective. The federal and provincial governments view these taxes as their money, and they’ll be coming to collect them.
You should avoid using these government remittances as a cash flow source. If you’re using cash from unpaid taxes, there’s little chance of recovery after just a few months. When the government does collect, it goes after the cash in your pockets (bank accounts). And, if you don’t have that money on hand, it will not be forgiven.
3
Many small businesses carry expenses that are more reflective of their image than of their operational requirements. Think of them as “pride and joys.” Could these be removed for the sake of your cash flow and business health?
Display ads, sponsorships, two-for-one specials, happy hours, liberal refund policies—the list goes on and on. These expenditures have some basis, or you wouldn’t have talked yourself into them in the first place. But do they really bring in more customers? And do these extra customers spend more money? Your marketing dollars need to be spent wisely, especially if your business is running into cash flow problems.
4
It’s time to take a hard look at the people you employ. As a small business owner, it’s never easy to let someone go, particularly if you’ve become friends after years of working together. In many cases, employees who are brought on for a specific reason eventually are no longer needed (or scarcely so).
By keeping these people on the payroll, you put every other employee, as well as your small business, at risk. If you’re able to reduce your employee count, it’s better to do so earlier rather than later to ensure you have enough cash on hand.
5
Every business structure has three kinds of expenses: fixed, variable, and discretionary. Fixed expenses are needed to “open the door” each day. Variable costs generally fluctuate with sales volume and are needed to meet greater demand. Discretionary expenses, however, have no direct relationship to your income.
These small business expenses need to be examined, ideally with someone without bias, such as your accountant, small business consultant or trusted advisor. He or she will continually ask, “Why?” and push you to trim the fat.
6
Sure, there are reports of fabulously successful owners who financed their small businesses using business credit cards. But, while these few examples make headlines, millions of others fail with this approach.
It’s too easy to spend like you’ve got cash on hand when you use a business credit card. Operate on a cash basis and avoid what is typically used for consumer credit. Spending on a credit card can quickly lead to cash flow shortfalls if you aren’t careful.
7
You can only achieve so much by cutting costs. At the end of the day, a good business owner makes money and builds a healthy cash reserve. If you’re having a cash flow problem, the root cause could be that you don’t have enough sales coming in (cash inflow). The way you earned your original customers may not be the way to bring in your future customers. Explore new avenues for building brand awareness in your community.
If cash flow problems are threatening your business, you need to take a calm but measured approach. A gung-ho, full-speed-ahead attitude may not be enough to turn things around. Analysis, forecasting, and planning on your own are great, but it is always a good idea to get advice from a trusted advisor in such matters.
It is better to make the difficult decisions now than to find yourself with nowhere left to turn later. It’s worth taking the time to curate a solid business plan to understand your business expenses, estimated profit margins, cash inflows and cash outflows, and how much cash you need on hand for your business structure (cash reserves).
Could you benefit from informed advice regarding your small business’s cash flow management? Find a Padgett location near you to schedule a free small business financial assessment and learn how to maximize your profit margins.
