The old adage “cash is king" still carries weight when it comes to effectively operating and growing a small business. It's essential to maintain operating cash to fund the daily operations of your business, but cash reserves beyond that can be viewed as capital that can be used to fund growth or reinvestment in the business. Before even entertaining the question of cash versus credit, you should make sure you have a clear picture of what operating cash you need to comfortably run the business.
So, what can a business do to make sure there is adequate cash flow? Take a look at the following tips and see what you can do today to integrate them into your business.
- Keep good books. Many small business owners let their bookkeeping fall to the wayside because they’re so busy operating their business. Small business owners wear many hats, so it's understandable to be busy, however if the books aren’t organized, troubling times lie ahead.
- Don’t delay or put off taxes. Every quarter look at your earnings and expenditures and estimate withholding taxes, land taxes, and other liabilities. Also look at what you bought over the previous quarter that could be a write off for your filing. Work with your accountant and tax professional to make sure you aren’t taking too much money out of your revenue.
- Make a budget for your monthly expenditures. Look at the past 6 months and see what you spent monthly for business costs. Include your office supplies, employee costs, utilities, and material. What you’re looking for is any “leaks” where small amounts of money are being spent but not recorded. This usually occurs when money is taken out of cash to pay for supplies that ran out employee costs that were ignored in the past. They are small sums of money bit they can add up. Stopping these leaks can keep cash in your account ready for unexpected costs.
- Start an emergency fund for your business. No matter how small amount you can add to it, put it in. Then consistently add to the account as you move along throughout the year. Even when things are tight for a month don’t neglect putting a little money into this fund. It’ll help tremendously when an emergency occurs.
- Always know what the bottom line is for your business. This may seem self-evident but there are plenty of small business owners who have no idea how their business is doing on a daily, or even weekly business. Don’t guess, it's important to have a hard number in your head for the worth of your business. Also, keep track of seasonal changes to the bottom line; if you produce a product or service that is more seasonal. The idea is to gauge those times when you’ll have plenty of cash in the bank for a solid cash flow. Just remember, being busy doesn’t equal money in the bank. It’s only after clients have paid you that you can count on the cash.
- Cash flow forecasting. With a cash flow forecast, you’ll be able to see which months you can expect to see a cash deficit, and which months you can expect a surplus. You’ll also be able to get a pretty good idea of how much cash your business is going to require over the next year or so to survive. You can gain a lot of insight into your business by comparing actual figures to what you forecasted. If there are discrepancies between the two numbers, dig further to see what might be happening.
Cash flow is the lifeblood of small businesses, but sometimes due to slow receivables or unforeseen circumstances, businesses find themselves in a cash crunch. Being short of cash can be frustrating, stressful and disappointing, but with a bit of adaptability and careful planning, you can use this cash crunch as a learning experience to strengthen your business's finances for the future. Have questions? We've got answers!