The biggest obstacle for many small businesses to overcome is cash flow; in fact, 82% of businesses that fail do so because of poor cash management. So how does a young business avoid the pitfalls that lead to these problems?
Manage Your Invoice Terms
When you send out invoices, how soon do you expect to be paid? 15 days, 30 days, 90 days? In general, you want to get paid as soon as possible. When you negotiate with clients, get them to agree to the soonest terms you can.
While you want your clients to pay as early as possible, it benefits you to get yourself a little bit of breathing room when you’re paying invoices. If your supplier is able to wait 30 days for a payment, you can take the necessary time to prioritize bills and make sure everything is getting paid when it’s due without putting your business into a cash crunch.
Give Clients A Benefit For Paying Early
Even if your client needs an invoice with a 30-day payment window, you can often encourage them to pay sooner by offering a discount on the statement balance, or a discount on their next order. A discount for paying early often works better psychologically than a penalty for paying late.
There’s An App For That
There is no excuse for your business to be disorganized. Between online banking, online money management, and accounting software, tax time should be no trouble at all. Use online software for your invoicing, and create a dedicated cloud folder where you save snapshots of each and every business receipt, and you’ll be ready to go as soon as your accountant asks for your paperwork. Many online accounting websites even match your receipt pictures to the expense in your system, making things even easier on their end.
Plan For Your Expenses
If you already have a household budget, that’s fantastic, and will make this bulletpoint easier to manage. If you don’t, it’s time to start one. If you’re earning your own money, you need to know how much of it you’re going to have to live on from your business. When you get a regular paycheck from your employer, it’s easier to live paycheck to paycheck; when you’re self-employed, that can be the death of your business.
Know how much you need to withdraw from your business for living expenses each month, and also know how much your business needs each month to pay any of its expenses. Anything extra should be reinvested for growth, or saved against slower cycles, especially in the early years. There will be time later, when your business is well established, for exciting vacations and new homes.
Do Not Spend Your 941 Money
If you have employees, you are required to set aside a certain percentage of money for their Medicare, Social Security, and federal income tax payments each period. Do not, under any circumstances, borrow from this pool of money, or tell yourself that you’ll catch up later. Have a separate account that you pay into each pay cycle, and pretend that money is completely gone from your business. In essence, it is, and you do not want to deal with the penalties and fines that come with being late sending that money to the federal government.
There is no excuse for entrepreneurs to not know at least the basics of finance and accounting as they go into business. Tax law is complex, and marketing at the highest levels requires an expert, but if you’re going to run your own business, you should be able to read a balance sheet, use Excel, and handle the basics of balancing a checkbook. If you don’t know how to do these things already, that’s fine; there are plenty of online resources to help you learn. You can contact mentors, take a basic accounting class online or at a community college, or find a great accounting program online and use the tutorial section.
But even if the first person you hire for your business is an accountant, you need to know enough to make sure that they’re treating you fairly and giving you accurate information.
Small businesses are often more flexible than larger companies and are better equipped to handle changes in economics, product, or service. But they are also more vulnerable to the ups and downs of cash flow than larger businesses and are less likely to be able to get inexpensive credit to make up shortfalls.
What money management advice do you like to give to new, small businesses?