Every week as SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wednesday on Twitter from 8-9 pm ET. This is excerpted from my recent interview with Dawn Fotopulos. Dawn is an Associate Professor of Business at The King’s College in NYC, the award-winning author of Accounting for the Numberphobic; A Survival Guide for Small Business Owners, which won Best Business Book of 2015, and distinguished professor in the Woodard Institute for accounting professionals.
SmallBizLady: WHAT IS SUCCESS? WE TALK ABOUT IT SO FREQUENTLY, BUT NO ONE EVER QUANTIFIES IT!
D.Fotopulos: It’s living off your own cash flow. It’s having enough money to support the business and your household.
SmallBizLady: YOU ARE CEO OF DF CONSULTING, INC. YOU’VE BEEN AT IT FOR OVER 17 YEARS! WHY DID YOU START THE BUSINESS?
D.Fotopulos: I may run a business but more importantly, I’m on a mission! I really am. It’s outrageous that over 50% of SMB’s are failing in their first four years of operation. I’m dedicated to changing that statistic. Brad Smith, CEO of Intuit said from the big stage at QBC “if we could improve the survival rates of SMB by only 5%, we could eliminate the unemployment problem in the US.” Wow, Brad. We can do a whole lot better than that. In the last five years alone, my team has saved hundreds of businesses that would have gone bankrupt applying Numberphobic principles, some of which we’ll reveal on this call. There’s no better way to double SMB survival rates than to show SMB owners how to manage their cash flow.
SmallBizLady: IN YOUR EXPERIENCE, WHAT ARE THE THREE MOST IMPORTANT QUESTIONS THAT EVERY SMALL BUSINESS OWNER MUST KNOW HOW TO ANSWER?
D.Fotopulos: 1. Am I making money? (Showing a profit). 2. Do I have enough cash to pay the bills for the next two months (Cash Flow). 3. Am I building wealth or destroying it? (Net Worth)
SmallBizLady: WHAT DO I DO IF I HAVE NO IDEA HOW TO FIND OUT THESE ANSWERS? WHERE DO I LOOK?
D.Fotopulos: If you can’t answer these questions and know the answers cold, you have some learning to do. If you’re not sure, you’re not alone. But if you do learn how to read your financial dashboard, your Net Income Statement, Cash Flow Statement and Balance Sheet your odds of survival go up dramatically. What if a two-week investment of your time could change the next ten years of your life? Is that worth it? You bet. If you read the comments about Numberphobic on Amazon, that’s what’s been happening with people who bought and read the book. It’s actually a funny book on accounting. No one would ever put those two things together!
SmallBizLady: WHEN PLANNING THIS CALL, YOU MENTIONED TO ME A PRETTY CRAZY STATISTIC: THE JPM INSTITUTE (IF THEY ARE CORRECT) STATES THAT 25% OF SMBS HAVE ONLY 2 WEEKS OF OPERATING CASH ON HAND. THAT’S NUTS!
D.Fotopulos: It’s not just nuts: it explains why SMB failure rates are so high. It’s not that they don’t have enough cash; they don’t know how to manage the cash they DO have. Anyone ever give blood? How come they never pump all the blood out of your body? Because you’d be dead! Blood is to your body as CASH is to your business; not profits, but profits that have been realized because clients pay their bills.
To improve cash, make sure you invoice on a timely basis; don’t let the sun go down without you invoicing a client if it’s time to do so. If you don’t think it’s a priority to get paid, I promise you, your client won’t think so either. Don’t assume they know what they owe you either. The longer they owe you money, the less the likelihood you’ll ever get paid.
SmallBizLady: HOW COULD A SMALL BUSINESS OWNER IMPROVE CASH FLOW IF IT’S THAT IMPORTANT?
D.Fotopulos: Send out the invoice STAT. Second, negotiate for payment terms when you make the sale, not afterward. Most people are so excited when they get a new customer, they forget to do this. The customer needs to know upfront what the expectations are regarding payment. If the terms are net 30 days, that means you expect to get paid within the month AFTER the invoice has been sent out. AT day 31, the client is late. Just remember, the clock on payment doesn’t start ticking until you send the invoice out. That’s the trigger for payment.
SmallBizLady: CAN YOU SHARE MORE WITH US ABOUT THE DIFFERENCE BETWEEN CASH AND PROFIT? HOW SHOULD I BE THINKING ABOUT EACH IN MY BUSINESS?
D.Fotopulos: Profit is what’s left over after you take all your expenses away from revenues. Think of revenues like a big pile of money. Then you have to pay everyone; suppliers, accountants, rent, insurance, web developers etc. Net Income is what’s leftover. But someone customers take time to pay you. Sometimes they take discounts. Sometimes they go out of business. So it’s extremely rare that profits and cash flow are the same in the same time period. That’s why you have to statements that help you track both; Net Income tracks Profits, and a Cash Flow Statement tracks, well, Cash Flow!
SmallBizLady: SO, HOW DO I FIND OUT A) HOW MUCH CASH I HAVE ON HAND AND B) HOW LONG IT WILL LAST ME?
D.Fotopulos: If you have an accountant, every month they send you statements. Usually, that includes a Net Income Statement and Cash Flow Statement. Look at them! If you don’t understand them, read the book, then ask your accountant in that order. If you have a bookkeeper, they can answer the questions too, for less cost. How long the cash on hand will last you is a function of how much you’re spending every month to run the business. That’s called your “burn rate”. If you’ve ever watched Shark Tank, that’s a favorite question Mr. Wonderful and Mark Cuban ALWAYS ask.
SmallBizLady: HOW DO I FIND OUT WHAT MY MONTHLY “BURN RATE” IS?
D.Fotopulos: You should know this number cold. If you don’t, your Net Income Statement will tell you. It’s like the mirror to your business. Once you understand it, you’ll be running the business instead of the business running you!
SmallBizLady: ONCE I’VE NAILED DOWN THOSE NUMBERS, IS IT POSSIBLE TO CREATE A PLAN FOR HOW I CAN FORECAST MY CASH NEEDS IN MY BUSINESS OVER THE NEXT 2-3 MONTHS?
D.Fotopulos: YES! Look at your expenses from last year. Will they be higher or lower this year? Map it out month by month. Now add it all together. That’s the forecast for what you’ll need. Often there are surprises good and bad, but it’s a great starting point.
SmallBizLady: IF I WANTED TO FIND MORE CASH IN MY BUSINESS IMMEDIATELY, WHAT ARE THREE THINGS I CAN START DOING TODAY?
D.Fotopulos: Invoice your clients! 90% of SMB owners I’ve spoken to NEVER INVOICE THE CLIENT. That’s not only crazy, it’s financial suicide. Service providers are REALLY bad at this. Are you an SEO expert? Get that invoice out as soon as you finish the project.
Second, make it easy for clients to pay you. if you are working on a multi-phase project, invoice at interim stages. Don’t wait until the end and send one, huge invoice for the client to choke on. If you send smaller invoices with greater frequency, you will get paid faster. Try it. It works like a charm.
Third, get to the know the accounts payable clerk at the client. That’s the person who cuts your check. They get NO respect inside their own companies, but trust me, they are the KEY to your cash flow. I always send a thank you note to these folks. I really do appreciate when they pay my bill. I know them on a first name basis. Get to know your A/P clerks and what will happen is, they’ll make paying your invoice a priority. Try it and LMK.
SmallBizLady: ARE THERE ANY OTHER “HIDDEN” AREAS IN MY BUSINESS WHERE I CAN FIND AVAILABLE CASH? OR ACTIONS I CAN TAKE?
D.Fotopulos: My book Accounting for the Numberphobic will take everyone through a super simple, step by step guide on how to make this real in your business. If you follow the easy steps laid out in the book (which won Best Business Book in 2015 btw) you WILL improve your cash flow almost overnight; for sure within 30 days. You’ll be struggling a LOT less to pay the bills.
It’s also a funny book! It’s illustrated by a Disney artist and makes all this finance stuff really easy to understand. The numbers are brush strokes on a canvas, they paint a picture. If you can understand the picture, you’ll make more money with half the effort.
BTW, should anyone purchase the book or the audio version, email me at firstname.lastname@example.org and I’ll be happy to send you the study guide that goes with it as my gift to you. It helps make the ideas come alive.
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