What do you consider the most important factor in small business success? I won’t keep you in suspense, the two words that sum it up perfectly is: CASH FLOW.
Sure, sales are important. You have to have clients and provide them with great products and services. Every small business, even our business here at The Payroll Department, grows with sales.
Then, of course, you have to make money on those sales, so profit becomes of greater importance than making sales. If you aren’t making money, or even breaking even, you are losing money and that’s never a good thing. You have to be sure the outcome of each transaction is profit.
But what keeps your business going from the time you make the sale to the time you get payment? CASH FLOW. You could have $1 million in sales, but never get the money in the door and go bankrupt. At the end of every day, having more cash come in than what is going out is the only way you will outlive the other small businesses that fail each year.
Here at The Payroll Department we want not only our clients to be successful, but all small businesses to thrive.
How do you protect cash flow in your small business?
The No. 1 way of protecting your cash flow is keeping timely and accurate books. You have to know where you stand financially at every moment. That’s the only way you can make informed decisions that are in your best interests. That’s why having a professional bookkeeper is also in your best interests.
Bookkeeping is often one of the least favorite tasks small business owners have to undertake. It takes knowledge, it takes organization, and it takes time. Just like outsourcing payroll services has become more the norm, entrepreneurs are finding that outsourcing bookkeeping takes the pressure off and provides them with timely information to run daily operations (read: cash flow) and to make the important and big decisions.
That being said, here are five more ways you can keep your cash flow on track and flowing smoothly in your small business:
- Reduce or Eliminate Accounts Receivable Collection Time
Just like it was noted earlier, you can make a million dollar sale for which you never get paid. Reduce the risk of that happening to you by establishing processes and policies in regard to payment receipts. Perhaps you will get paid up front, or get an initial deposit. Set a policy about payment terms and go for the shortest span as possible; instead of Net 30, go with Due on Receipt or Net 10. For larger transactions, you might consider an incentive for early payment, perhaps a 1% to 5% discount. Make collections on accounts receivable a priority.
- Resist the Temptation to Offer Large Discounts and Big Sales
Thinking you can make up profit through volume can be a slippery slope – going downhill. It can be good business to offer promotions to attract new customers or for the occasional customer appreciation event, but when you start making it a common practice to discount everything to get customers, is just like trying to “make it up through volume.” If a customer knows you are going to have a “big half-price sale” every few months, pretty soon they are waiting until the sale to buy anything. You can’t be predictable and you can’t make the sale price your everyday price. You have to be able to pay your expenses and make a profit on most every transaction.
- Set up or Extend Accounts Payable Terms
While you are trying to reduce your collection times, try to extend your accounts payable terms. Always try to get the best terms possible when you negotiate the purchase. If you have been a good payer for some time and have a solid relationship with the vendor, ask for terms. When you have a large transaction try to negotiate payment in more than one or two installments. And, try asking for a percent discount if you pay in advance.
- Always Avoid Unnecessary Fees
If you can stay on top of your cash flow with timely receipts and expenses, you might not have to ever deal with late fees. On the other hand, when cash flow becomes a problem, late fees and penalties can quickly add up making your bottom line bleed. It’s not just late fees, but interest on loans and credit cards, overdraft fees and NSF fees are costs that small businesses with a positive cash flow don’t have to pay.
- Pay Yourself, but be Reasonable.
Savvy small business owners don’t fall into either one of the common traps when it comes to paying themselves. They are neither the martyr who never pays themselves, nor do they drain the company. Every entrepreneur who has weathered the start-up and lean years know that just because you are the owner of a business, you probably aren’t going to start out with a CEO caliber salary. With the help of a bookkeeper and an accountant, you can set prices, manage your business, build in profits and set a regular paycheck that will pay the bills.
These are just six of the most important elements of managing your small business in a way that provides a comfortable cash flow. However, you must be concerned about other aspects of your financial picture such as taxes. Getting a paycheck may not always be in the form of an actual employee’s paycheck, but you will still be responsible for the income tax and other payroll taxes that are due on income. (A good rule of thumb is to set aside 25% of your “salary” for taxes.)
Tracking costs and transactions, sales tracking and recording expenses as they happen keeps you on top of the financial picture of your business. It’s not easy, but it is easier with an experienced bookkeeper like Grace Walker by your side. The Payroll Department can help not only with payroll services, but with bookkeeping services as well. Contact us today at 317-852-2568.
Running a small business is not easy. Trying to do it with cash flow problems saps the energy and enthusiasm of many small business owners. So make it a point to get paid as soon as possible, only spend money you actually have, and only if it will be used to help you make more money. Repeat over and again and watch cash flow – and your business – grow.
-Elaine of The Payroll Department Blog Team