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82 percent of small businesses in America fail due to cash flow issues. To ensure your business doesn’t become a part of this statistic, good financial management is key. Proper financial management is the only way your business will stay in the 18 percent minority.
The harsh truth about entrepreneurship is that close to 32 percent of small businesses in the country go under in their first year of operation while 50 percent never reach their fifth year. The reason? Poor cash flow management. Most small businesses simply run out of money! Find out the financial status of your business with FairFigure.com.
The good news though is that you, as a business owner, can easily avoid this predicament by managing your finances properly. Here is how:
Good Cash Flow Management
Cash flow refers to the total amount of cash going out of and coming into your business and is generally affected by a variety of things, and one of them is your pricing strategy.
If you, as the owner, underprice your services or goods, then chances are you will not have enough money flowing into the business. Overpricing, on the other hand, could lead to you going out of business since you won’t be making enough sales. As such, you want to make sure that you find that sweet spot where your pricing is competitive enough that you don’t have to put in too much effort for little pay.
It’d help if you also came up with a decent billing strategy that helps ensure your money flows back into your business. If most of your money is tied up in invoices that are yet to be paid, then you might lack the liquidity you need to keep your business afloat. If you’re facing billing issues, try to encourage your customers and clients to pay their dues on time by offering them time-based discounts.
For example, you could introduce incentives such as 2/10 Net 30. With this option, customers receive a 2 percent discount anytime they settle their invoice within ten days. If they fail to do so, then they pay the full amount in 30 days.
Also, consider creating a budget, which is a lot easier to accomplish if you have a dedicated checking account for your small business. A budget will not only help you keep track of your expenses and income, but you can also use it to set a ceiling for your expenses and a revenue line. Setting limits could help ensure that you always have the cash you need to keep your business running.
Use Affordable Credit
Most small business owners wrongly assume that credit is a bad thing. But that’s not always the case. Provided it’s used responsibly, credit can be quite useful to small businesses. For instance, a loan capital could help you pay utility bills, meet payroll needs, hire more people, acquire equipment for your business, and so forth. In the end, a decent line of credit could help keep your business operational until invoices get paid.
However, the trick lies in selecting a credit product that your business can afford. As a business owner, try and avoid borrowing from loaning institutions that charge very high-interest rates such as banks. Apart from charging high rates, most of these institutions also require you to pay packaging fees, late payment fees, NSF fees, processing fees, origination fees, prepayment penalties, and so forth.
It is these charges that typically make bank loans so expensive for small businesses and startups. Due to this, you are advised to take time to compare other business financing options to see if there are options that could best suit your needs.
Implement Saving Techniques
There are many options small businesses can use to save money and on top of the list is operating a separate business checking account. The good thing about having a separate account is that it makes it easy to separate personal and business expenses. Another option would be to make sure you closely monitor your accounting books – for an easier time tracking your books, consider automating the process by using accounting software applications such as QuickBooks.
Reviewing things like expenditure and income records will also help you understand where your money is going, making it easier to avoid unnecessary expenditure. Finally, make sure you evaluate all your expenses and check to see if they contribute to a positive ROI (return on investment). If an expense isn’t positively contributing to the business, cut it off and save that money.
Likewise, checking bank reconciliations and outstanding invoices can help you identify cases of inaccurate figures as well as embezzlement and fraud. Issues such as these can eat into the money you’d have, otherwise, saved for other business projects.
Source for Extra Financing
From time to time, your business will need additional financing for you to maintain a steady cash flow. And while we have already looked at debt financing, it isn’t the only available option. You could also inject capital into your business through something known as equity funding.
This option is unlike debt financing where you are required to repay the loan even if your startup fails. However, there is a tradeoff – and that is you might need to surrender some control of your business to the individual(s) who’s investing. As such, it is vital to ensure that you choose a congruent and competent partner if opt to go this route.
Invest in Growth
Business finances aren’t just for running your business; they are also meant to help it grow. So, once you are done putting measures for acquiring additional capital and saving in place, the next thing you need to do is set aside some cash for exploring opportunities you could use to grow your business.
Growth comes when you diversify, invest in innovative technologies, and attract a professional and highly qualified and efficient workforce. And all of these require financing. That’s why you are advised to have extra cash in hand when opportunities arise.
If you still aren’t sure of how you will properly manage your finances as a small business owner, then do not hesitate to bring in a professional. A trained and qualified accountant can help you come up with a system that best suits your needs and works for your business.
