According to most statistics, at least half of all new businesses in the United States fail within the first five years. Why? It’s certainly not for lack of good ideas or motivation that kills the business; it’s typically the lack of cash flow management.
Cash Flow Challenges
According to the Small Business Administration, the average cost to start up a business is $30,000, and that’s just the cost to get off the ground. New businesses must weather all kinds of storms, while continually investing more money into growing the business.
In the first few years, your business may feel somewhat unstable. Simply having cash available likely seems like an effort! However, cash flow challenges are not necessarily a bad thing. It’s the inability to navigate through cash flow issues that creates the bigger problems.
Losing Track of Cash
One of the worst mistakes you can make as an entrepreneur is to lose track of how much cash you have available on a day to day basis. If you don’t know how much cash you have to operate, how will you know if you can make payroll? How will you know if there is enough to pay your vendors?
Many entrepreneurs falter in two ways: they take on more than they can handle (spending too much and expanding too fast) and they don’t collect their receivables.
How to Improve Cash Flow?
Bottom line: Collect your receivables as fast as possible and slow down your payables without jeopardizing your relationship with your vendors and suppliers.
In a dream world, we would all pay our vendors as soon as we receive their bill. In reality, we should be paying bills according to our cash flow… “If we pay this bill today, how will that affect our ability to pay others over the next few weeks? How much cash is left?”
If your receivables are poor, it’s going to be difficult to project how much cash you have available at any given time. Two very important pointers for proper receivables management – establish a consistent invoicing schedule and invoice as timely as possible.
Creating specific payment terms can also be helpful. Establish early and up front with your customers how you expect them to pay. Also, incentive discounts may be added for those who pay on time, or penalties for those who do not. If payment is due within 15 days, reminders and/or late fees can come into play on day 16 if payment has not yet been received whereas “due on receipt” often gives people an open door to pay when they can.
Finding ways to improve cash flow from existing assets, prior to purchasing new assets, is another way to get a handle on where your cash is going. Take stock of what you own and evaluate whether or not it’s still creating value for you. We often make purchases early on with lofty goals of what that purchase will bring. Once we re-evaluate a few years later, we sometimes discover our goals have changed and we no longer need that “thing” that can now be sold for cash.
A good example is in inventory. How much cash do you have tied up in products you only sell from time to time? If you have existing inventory that hasn’t turned over, that equals potential cash flow that’s just sitting in storage. There’s no need to order new inventory if you already have plenty on hand, and products that are no longer selling well can be discounted, or sold in bulk to recoup some additional cash.
Entrepreneurs are never lacking in ambition or dedication, but they do often find themselves lacking cash. Business financial planning is an essential skill that’s often glossed over as one of the more boring, technical aspects of running a business, but with cash flow management comes security, and financial security often goes hand in hand with business success.
**Short term cash flow management is a non-negotiable service for all of our clients. It’s simply just part or what we do, and we insist that the business owner be involved in a weekly short-term cash flow management/forecasting phone call. In that phone call, we review your current cash position, expected cash needs in the short term (such as payroll next week, term debt re-payments in the next few weeks, etc.), expected short-term cash inflows, and then required current cash outflows (weekly bill payments today). We have found that if you spend 15 to 30 minutes a week reviewing this information, you will usually be way ahead of your competitors as far as cash flow management goes!
Virtual BeanCounters serves entrepreneurs with an empowering finance division so they can focus on innovation and creating value for their clients. We believe you can accomplish the business of your dreams a lot easier with a professional accountant on your team! Contact us by phone at (913) 649-1040 or click here to visit our Contact page