Cashflow …. It’s up there as one of the top 10 issues holding small businesses back from the success they desire. It’s not rocket science; but it can be make or break if it dries up. So here’s some basic stuff that hopefully gives some useful ideas about how to make cashflow work for you rather than against you.
- Know what it is! Forgive us for preaching to the converted, but there are a fair few of us entrepreneurs who started out not knowing the difference between profit and cashflow – so let’s just be clear… Profit is income less expenses, but not all income represents cash in. Cash flow, on the other hand, is the $ moving in and out of your business at any given time. Cash in is the $ coming in from customers or clients buying your products / services. Cash out are the payments you make for expenses e.g. rent, loan payments, taxes etc. More money in than out in the business
checking account equals positive cashflow, whilst more money out than in equals negative. Obvious, we know, but good to be clear.
One of the most common reasons small businesses fail is due to lack of cash – this is particularly true if you are in the `startup’ phase of making your business happen, and also if you operate in a season business. Making a profit but having no cash is a common and potentially fatal error. It can happen if you have a number of invoices sitting with clients who are yet to pay for your hard-earned work. Their balance as `accounts receivable’ may make your income statement look good – but it won’t stop your bank balance registering a big fat zero from which you need to be drawing available funds to survive and thrive.
So what to do to avoid this situation?
- Really know what it is! Nope… that’s not a typo… you need to really be on top of your cashflow – it’s current
status and it’s future projection – at any given time. Not only is this critical for investors – it’s critical for your own mental health! There are a heap of ways out there to be cash-flow savvy these days for small businesses. Whether it’s apps or ready made templates that you work best with, get yourself some kind of platform into which you can punch your business figures on a regular basis so that cash gridlock does not happen – and, if it looks like it might, so you can do something about it before the Titanic sinks. A few options are listed below:
- Accounting Software Packages: Pretty obvious, but as you can imagine, MYOB, XERO, Quickbooks and most accounting software packages will contain cashflow tools. For an up to date review of 6 of the most popular ones for small businesses, check out Stephen Withers article, June 2018″; Whichever you choose, the key is knowing where they are and how to get the most out of them; something that usually entails having a bit of a trawl through the user guideline manual / Q&A links….tedious but worth it if it means you get a handle on them first time round.
- Cashflow apps: You may be like me and feel mildly nauseated at the prospect of wading through a million different app options that claim to help you take control of your business finances. Nevertheless, if you can stomach it, there are a few that are worth checking out:
- Pulse: $40 per month; you get access for 1 user and 2 financial accounts – which, whilst they say is more suitable for personal use, is ample for a small business with 1 person that handles accounts. Pulse gives you a few bells and whistles for its higher price, letting you track income and expenses, track cash flow by date, project future cash flow and export data, as well as run a range of different reports by category.
- YNAB: A much cheaper option at roughly $10 per month, You Need a Budget presents itself as a personal-use app, however, it is equally viable for a small business starting up. It’s a step own from Pulse for sure, but will still enable you to track goals, stay aware of mounting debts, and access realtime data as to the state of your cashflow at any given moment. Perfect if you are operating as a sole trader at this point in your business journey.
- Zoho books: If you are already using a CRM like Zoho for your sales, it makes sense to use the add-ons that they’ve got in place for this side of your business activities. At $9 per month for the basic plan, you’ll be able to make projections, generate basic reports, do bank reconciliation and track expenses.
- Templates: If you’re not keen at forking out for an app at this stage there are plenty of free ready-made templates out there that you can use to manually enter your financial data.
- Microsoft Office and Google Docs both have their own suite for free cash flow projection templates.
- State Government websites also offer a range of resources that can be really helpful for small businesses in this regard. If, like us, you’re a Victorian business jump onto their website for a template that you can adapt to your own use. If you’re picky, you can always shop around other Australian State Governments and see which one offers the resources that suit you best!
- Have strategies that generate positive cashflows:
This could be a whole blog entry in itself, but here are a few basic tips from those who have gone before on how to ensure your business’ cashflow is healthy:
- Get the basics right! Issue correct invoices on time, follow up on them, and be prepared to halt services to delinquent payers. Develop payment agreements with your customers from the start of engagement so they know the expectations from the get-go.
- Review your estimated cash flows to actual to see where forecasts have not matched up to reality and why. Then modify your course of direction to redress this in the coming cycle.
- Monitor stock levels. Don’t let all your cash get tied up in too much stock, increased storage and insurance costs. Practice good stock control to keep stock at efficient turnover.
- Review banking products. Using the right banking transaction product can make a big difference to the time it takes to get the money you’ve earnt into your pocket sooner.
- Reduce overheads. Make your business more environmentally friendly to reduce costs on power and water. Use virtual communication rather than office space. Consider outsourcing low-value aspects of your teams work to offshore sources, such as data entry or basic administrative tasks. This will free up your team to focus on the stuff that really brings in the $ – like strategy, quality, customer service and sales and marketing.
- Ultimately what this all comes down to is …. Increase your client profitability – work at getting the `good’ clients – the ones that fall into your `ideal’ client category (you don’t have one? Call us!) – and letting go of the `bad’ ones (not literally – just the ones that don’t fit your avatar.) Strategize how you are going to ensure that each of these clients generates the revenue your business requires, at the cost of goods sold that you can afford without compromising on your quality. Client profitability is a whole other area in itself… but these are just some thoughts to get you dreaming…
- Have a financially-skilled business mentor: In reality, it is not for want of tools and resources that businesses let their cashflows get out of hand – more than anything it is stress, perhaps over-enthusiasm, and lack of time. It might seem a complete contradiction, but making time to have someone to check in with on how the business is going once a fortnight / month will actually generate time and revenue (if they’re good) in the longer run. Having that appointment in place will give you an accountability point to ensure you are keeping your cashflow records up to date, help you fix potential problems before those problems sink you, and give you the human support that is so needed, and so lacking, for individuals running their own small business.
How to find a good business mentor? Ah…. Well that is a topic for another time. So watch this space….
References:
https://www.lindfieldpartners.com.au/news/challenges-facing-small-business-owners-2017/