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Would it surprise you to know that one of the primary reasons small businesses fail has to do with budgeting and cash flow?
They simply run out of cash.
When we think of business failure, we're more likely to think of a product that didn't have a market or a poorly executed idea.
Unfortunately, most of the time, this is not the case, and worst still, these companies may have been thriving had they been on top of their business finances.
According to the U.S. Bureau of Labor Statistics, only about 50% of private business ventures still exist after five years.
And since running out of money is frequently #1 or 2 on lists of reasons small companies fail, it's wise to properly set up your business finances early on and monitor them often to keep your business afloat (and profitable!) for years to come.
10 Financial Tips to Help Keep You in Business
1. Create a budget
There are so many good reasons to do a budget; it could be a whole other article! Let's start with how it can stop you from being a statistic.
You should view a budget as a positive and proactive step in your small business.
By setting a revenue line in your budget, the numbers can help you to break down what you need to do to achieve that figure.
For example, how many products you need to sell or how many hours you need to bill.
It sets a realistic financial goal that's measurable and keeps you focused.
Budgeting for expenses clarifies where you want your money to be spent and becomes a tool to help you monitor your actual expenditures if costs blow out.
Self employed workers should aim to keep expenses very lean in the initial stages of their small business.
Try to exist on the bare minimum and forgo any extravagances; they can always come later when your financial position improves.
Review your budget regularly to ensure your business revenue grows according to your business plan and exceeds your business related expenses.
2. Manage your cash flow
Many self employed people and new owners of small businesses may not have encountered the term cash flow before, or if they have, they don't know exactly what it is.
In a nutshell, a cash flow statement shows the timing of when money comes in and when money goes out.
If you sell a product and pay your suppliers 14-day terms, but your customers pay you 30-day terms, you could find yourself with a cash flow problem.
While this example is simple, it's not always that simple in business life.
You may need to make multiple regular payments at different times during the month, or you could be hit at any time with unexpected expenses.
Sometimes the money just isn't flowing in fast enough due to a client or two (or more!) not paying on time.
You can often navigate your way to better payment terms in many cases.
Here are some little things you can do:
- Notify large clients that you're a small vendor, as this can sometimes reduce your payment terms from thirty days to fourteen days.
- Build relationships with all the key stakeholders to ensure everything goes smoothly with payments to you – this includes managers who approve and sign off on your invoices right through to the accounts payable team who makes the payment.
- Invoice customers weekly instead of monthly.
- Send reminders when invoices are coming due and charge fees on late payments (at least to repeat offenders).
3. Treat cash as king
The quickest way to go out of business is to run out of cash! If you stopped receiving income tomorrow, how long would your business survive?
In the initial stages, run your business on cash only, growing your business and spending on expenses based on your available money. Use this tactic to motivate you to increase sales so you can keep investing in your company.
It will force you to pay close attention to what is happening in your business. When and how much money is coming in, and what you're spending that money on.
It will also help with the financial decision-making process when it comes to prioritizing your cash. There are always some things you can go without or do cheaper in the short term.
Strive to base your purchasing decisions on spending cash that will bring more money in the door.
4. Live within your business means
Keep company expenses down as much as possible, and when you need to make purchases make sure it is a good deal.
Every wealthy person lives within their means; it's the way you create a surplus to build your wealth. The same goes for your business.
Don't be the small business owner that likes to jet-set around the globe to attend events without thinking of the cost.
Or the budding entrepreneur that continually invests in technology or studies expensive course after course but is yet to get a client.
Avoid borrowing money from your personal funds above your original investment. And be careful before taking out a business loan to keep your company afloat.
There will be a period of time when your business income has grown, and you have cash reserves built up to afford to spend some profits.
5. Do whatever makes you the most money first
Write out your to-do list, and then prioritize your tasks by doing whatever brings money in the door first.
It's no use keeping all your administration and low-ranking tasks up to date if you're not scheduling the time periods to do the things that bring in money. If possible, delegate low-priority tasks to someone else.
In the beginning, you may need to take on work that's not precisely what you want to do.
If it's going to make you money, and that's what you need to do to achieve a profitable business, then do it.
6. Price yourself correctly
Your success will hinge on pricing your goods or services correctly. This is not an easy task by any means, yet it is one that you have to get right.
Under-pricing your products will leave you with a cash flow problem. Under-pricing your services will likely leave you feeling resentful and working too hard for too little.
Over-pricing also has the ability to send you out of business if it means you aren't making enough sales.
Some small business owners are afraid to ask for what they're really worth, and this usually tends to be a confidence issue.
It's important to remember that everything should be exchanged for a fair value. A customer will pay what your product or service is worth because it is of importance to them.
7. Set up systems and processes
Get all your foundations set up correctly, creating a sturdy structure for which you can leverage.
This step is crucial but often missed or sometimes put in place after a mishap or problem has arisen. Don't let this be you.
Think strategically from the beginning and save yourself some headaches.
Financially, this means making sure to keep personal finances separate from business finances foremost.
Pay your personal expenses from your household bank accounts and all company transactions from separate accounts you open for your business.
Regularly perform bookkeeping tasks and review financial statements to ensure you maintain positive cash flow and are meeting your business goals.
This may include:
- Using a simple accounting software – such as FreshBooks, Wave, or Xero
- Paying yourself and any employees or contractors
- Allocating money for taxes and other business expenses
- Setting up monthly, quarterly, and annual reporting
- Being mindful of self-employment taxes, including eligible tax deductions and filing of your estimated quarterly taxes (SECA taxes for Social Security and Medicare)
- Securing a business credit card and monitoring business credit rating
- Establishing a retirement plan savings account
- Purchasing business insurance
8. Don't wait until things are perfect
Any chance to earn revenue is a good one! Please don't get hung up on the fact that you don't have everything in place yet or that it's not exactly what you want to be doing.
There's no better motivator than just getting in there and starting, and we bet you'll learn something of value along the way.
Being a small business owner is a big learning curve and takes you out of your comfort zone.
Say yes to new opportunities, even if you feel unconfident. You may surprise yourself.
9. Choose congruent and competent business partners
When talking of business partners, we mean clients and the suppliers and professionals you work with to build your business and brand.
These can include a product supplier, web developer, graphic designer, accountant, lawyer, financial advisor, tax professional, and many more.
The key is choosing people that align with your business and your personal philosophy, and you are happy with how they operate.
This is essential as they will be not only your business partner but also one of your business fans. You want them to care for your company's success and financial plan.
Working with business partners not aligned with your business and your values can be draining. In the long run, it will be detrimental to your business success and personal well-being.
Remember that not everyone is an ideal client or supplier.
10. If you don't know what to do, seek help
No one person has the answers to everything, so don't be afraid to seek help where you need it. Play to your strengths.
If financial planning and numbers aren't your things, then align yourself with another person or organization specializing in business financials so you can focus on what you're good at, growing your business.
Many financial professionals are sole proprietors who would welcome a mutually beneficial relationship with another self-employed individual.
Let's face it, in one way or another, all your business decisions impact your business assets.
The first best decision you can make is to adhere to sound money management practices for your business funds.
- Keep your business and personal accounts separate.
- Establish a sound budget.
- Review cash flow and monthly income statements.
- Monitor monthly expenses and profit and loss statements.
- Focus on money making activities.
- Price your service or products fairly, and avoid “working for free“.
- Pay your business debts and bills on time.
- Use simple business accounting software or hire a bookkeeper or accountant.
- Engage in tax planning for necessary deductions and make timely estimated SECA tax payments.
- Keep tabs on your business and personal credit score.
- Remember, perfection doesn't exist.
- Hire experts as needed.
Successful entrepreneurs also pay themselves regularly, contribute to their retirement savings to invest for their future and reduce taxable income, and implement some self-care practices to avoid burnout!
Article by Money Coach Naomi of Ngage Prosperity and the WwM Team.