We’ve all heard it a million times “Cash is KING!” But proper financial management is the difference between surviving in business and being put out of business. You must understand the time value of money and manage your finances carefully. Just like you should have an emergency fund for your household, you need one for your business too. Everyone thinks they can pay a small business late, so at times you may find yourself at the mercy of your customers. You must exercise caution with your financial decisions. Don’t spend money and certainly don’t borrow money unless you absolutely need to, and know when you can pay it back and how you will turn it into more money.
Every business needs a financial structure that generates a profit to stay credible. Equip yourself with good money management skills so you can turn your business into a profitable success story. Here are the best ways to avoid cash flow problems in 2019.
7 Ways to Avoid Cash Flow Problems
Know Your Numbers Monthly
Review your financial statements by the 15th of every month. If you don’t know how to interpret your financials, leverage your accountant as a business advisor to teach you. By learning how to read your cash flow statement, balance sheet and the P&L or profit and loss statement, you’ll understand how well your business is doing. You need up-to-date financial information to make financial decisions. These statements tell you about how your money is working in your business.
The cash flow statement analyzes sources and uses of cash for operating activities, investments, payables, and receivables. The cash flow statement is always calculated based on a cash basis or cash in hand. The balance sheet looks at the business for a moment in time. It provides information related to the company’s assets, liabilities, and equity. Think of it like assets are an engine that drives the business, and liabilities and equity are engine fuel. The income statement reflects revenues, expenses, and profits over a specific period of time, such as a month or quarter. The P&L or income statement is always calculated on an accrual basis, which is when the order is placed or shipped, not when cash is received.
Keep Your Personal and Business Finances Separate
One important key to avoiding cash flow problems is to always keep your personal and business finances separate. I’m a big fan of even having separate banks for your business and personal finances. Secure a business credit card and put all related expenses on it. This should help you track your spending and keep records organized.
You will also do well in opening a money market account dedicated to your business, wherein you can transfer a certain amount of money from each payment that you receive and gradually build the emergency funds mentioned earlier.
Develop an Annual Business Budget
You should not spend any money in your business that you haven’t budgeted to spend. Payroll, inventory, shipping, conferences, software, professional development/coaching, and equipment are all things that you should include in your annual budget.
Watch Your Costs
Every business endures two types of costs – fixed and variable. While fixed costs are monthly recurring costs whether your business is making money or not, you have options when it comes to variable costs. To avoid cash flow problems, ask yourself WHY three times, before making significant purchases. And when you do spend money, it should be to increase productivity or improve your customer experience. Look for cloud-based software with free trials to make sure it’s going to solve your problem. Secure a free conference call line and use video conferences instead of traveling for a meeting. Leverage a home office or co-working space. Try bartering services with other professionals to cut costs. Be smart with how you leverage your resources.
Know the Procedures to Get Paid
Before you start work for anyone, know how and when you will get paid up front. Make sure you have a purchase order in hand or a signed contract. Do not ever take someone’s word as a contract. Push for electronic payments to get your money faster. Start collections on Day 31 if you have not received payment. Don’t ever be afraid to call someone to inquire about your payment status.
Measure Financial Performance
As a business owner, you must monitor the movement of your money in your business, so you are aware of potential cash flow problems. You need to keep track of ratios such as your Accounts Receivables Turn Over Ratio, or how long it takes you to get paid from your invoices. Start each year with a budget and when you look at your company’s financial statements, compare it to your budget and past performance in terms of revenue, expenses and cash flow.
Hire Professional Help
If you are not an accountant, hire one to help you. Don’t just call them at tax time—engage their services monthly as an advisor to your business. They can help you analyze your data, track your profit margins, and determine where your business is, going. Make sure you sign your own checks but get financial advice.
Whether it is tax planning or budgeting, hiring a professional accountant can go a long way in educating yourself about the numbers in your business. Don’t let your business suffer due to common cash flow problems. Keep the above tips in mind, stay on top of your financial statements and give your business a chance to prosper.