Business Owners, Watch Your Cash Flow!
Ambitious entrepreneurs will have the desire to achieve financial success by operating a business. However, the process of accomplishing this lofty objective is not a simple one. There are so many dynamics that need to be in place before running a business can lead to lasting wealth.
Statistics show that there is a high failure rate for new enterprises, and those that make it past the five-year mark may still find it difficult to attain and maintain profitability. Entrepreneurs have to be skilled in certain technical and theoretical disciplines in order to properly manage their businesses.
One of the critical skills that are often ignored or underappreciated by many business persons is the ability to carry out fundamental accounting tasks. Some entrepreneurs believe that once they are experts in their fields of endeavour or they are good at doing sales, their businesses will flourish.
While product knowledge and sales proficiency are both essential for a business, it is also vital for business owners to understand the financial details of their operations. Sales can be considered the life blood of a business, but accounting is its defence mechanism to protect it from illness.
Use simple accounting methods
You don't need to be an accounting expert, but you must be aware of basic bookkeeping steps to properly administer your business affairs. Keeping records of bills and invoices, working out input costs to determine selling prices, and managing the flow of cash are a few of these requirements.
Controlling cash flow is key, especially for small enterprises where working capital is tight. Cash flow is a measure of how much, and how often, money comes into and goes out of the business, and it tells you the amount of cash that is available at any given time to run your operations.
Keep your eyes on the cash
Improper management of cash flow can lead even a profitable business into serious problems. If insufficient money is available when required to create the products or services, then the sales will be negatively affected. Reduced sales means less cash inflow, and the vicious cycle continues.
There are many ways in which business owners may unknowingly mismanage the cash flow of their enterprises and put their operations in jeopardy. Let's look at some simple strategies which can help you to efficiently control the cash flow of your business.
Plan for annual expenses
With the pressures of running a business it can sometimes be difficult to take the time to plan ahead. If so, you may find that you approach each day hoping that you can do enough business to survive for the month, and that you are uncertain of the steps you need to take to get ahead.
You should prepare a budget of all the expenses that you expect to incur over a year, expressed as average monthly costs. This will indicate how much revenue you need to earn every month to meet your obligations. You can download a simple business budget at www.financiallysmart.org.
Manage your receivables
In some businesses, it may be necessary to give major customers extended time to pay for goods and services. Although these customers receive your offerings immediately, you may give them credit terms varying from seven to 30 days or more to make final payment.
While offering attractive credit terms may increase your sales, it could lower your ability to cover your bills or restock your business. If you have to pay cash up front for most of the inputs needed to produce your offerings, then you should refrain from giving your customers long credit terms.
Schedule bill payments
One variable that you need to keep track of is the timing of your bills and payables, so that you can plan for the efficient utilisation of your money. Very often, businesses struggle with managing cash flow just because the owners made ad hoc or uninformed spending decisions.
Use a calendar or spreadsheet to record the due dates of your recurrent expenses such as utilities or loan payments, as well as deadlines to pay your suppliers and taxes. Consult your payment list at all times to determine how best to allocate your available funds to meet your obligations.
Separate your income
Remember that the revenue that comes into your business is not profit for your personal use, as some of the inflows will be required to pay suppliers, expenses and tax obligations. You need to develop a method of separating your income to ensure that you can cover various obligations.
Put aside some of your daily sales to replenish stock and pay for statutory payments; if you charge GCT, divert the tax collected into another bank account. The cash remaining will be available to deal with all your other expenses, including your own salary or drawings.
If you find that your cash flow is insufficient to cover your costs, then you may need to obtain extra working capital and increase your sales. Once you keep a tight rein on your cash utilisation, you should find that it becomes easier to pay your expenses and make strategic plans for the future.
Cherryl is a money coach, business mentor, and founder of Financially S.M.A.R.T. Services. Her upcoming book, "The 3 Ms of Money" will reveal all the secrets she learned about financial success. Get more advice on money and business matters at www.financiallysmartadvice.com and www.entrepreneursinjamaica.com. Email comments to email@example.com.