20 Nov Stop the Cash Flow Drain
Starting a business is a financial balancing act. You need cash to get started and you need enough to hold you over while you generate buzz around your business and attract customers. But, cash flow challenges aren’t a start-up problem. As you scale your business, you can go from having plenty of cash on hand, to barely making payroll when your expenses double or even triple.
But, what can a business owner do to manage cash flow, when the money starts coming in?
1) Be realistic in your expectations. Many times business owners are too optimistic out of the gate. They think that customers will come in droves the first few months, when in actuality it can easily take over a year to generate enough monthly revenue to cover all of your expenses. So, planning ahead and having money reserves to tide you over when times get tough is the best way to ensure you stay ahead of the curve.
2) Look at your finances weekly. You can’t prevent a cash flow crunch after it has already happened. Check your numbers daily, if you have to, so that you always know where you stand. Most businesses go out of business because they run out of cash. Stay on top of your finances and if you can’t account for all the money coming in and going out, then you need to get expert help ASAP.
3) Make sure you have financial reports. Have your financial statements updated and reviewed each month. Whether you request them from your accountant or use online software to generate them, have them at your disposal to get an accurate snapshot of exactly where your business is financially – at all times. Always review your operating cash, this is the amount of cash your business has minus any money needed to cover your financing costs.
4) Pay yourself first. To be successful, you want to take out money for taxes, owner compensation, and profits before you pay for anything else. And, if you cannot manage to do this without going in the red, then your business model may not be viable. Keep in mind, in the beginning, your numbers may be tight. But, over time, if you do it right your business should have plenty of cash on hand to cover your expenses, after you pay yourself and take out money for taxes and profits.
5) Take a hard look at your spending habits. Truly go through your finances with a fine-toothed comb. Ask yourself, “where are you overspending?” There is likely at least one current expense that you can either reduce or cut altogether. Take the time now to find those money drainers and get rid of them before they destroy your cash flow.
There you have it… staying profitable is well within your control, if you take a proactive approach to managing your cash flow.
This week, bring someone in to look at your business. This can be a fellow entrepreneur or a profitability consultant. Have them look at your expenses, your revenue, your cash flow statements. Ask them to provide an honest assessment of what you can do better. Don’t get caught in the trap of being okay with hurting pockets. Take their constructive criticism and do better.