Small Business Cash Flow: Strategies for Making Your Business a Financial Success

By Denise O'Berry

Many small business owners don’t understand the importance of maintaining a healthy cash flow. More than anything else, cash flow determines the success or failure of a small business. Small Business Cash Flow covers all the basics of cash flow, from selecting a great accountant, to keeping money flowing in and out of the business, to budgeting and record-keeping.

• Language: English
• Publisher: Wiley
• Release date: Dec 28, 2010
• ISBN: 9781118044650

Book preview

Preface

Most small business owners hang out their shingles without having a clue about what’s required to be successful on the money side of their business. They see a bunch of numbers on a sheet of paper and groan about how they wish they’d paid more attention to math in school. But cash flow in a small business is about much more than math. It tells the story of your business and can be adjusted by simple actions you can take to move your business from failure to success.

In the United States we don’t raise business owners, we raise employees. So it’s no wonder many small business owners who have a passion for their business have no idea how to make it financially viable with a healthy cash flow. But somehow you’re making do.

There are millions of you in business. Most of you have fewer than 20 employees. A good portion of you have only one or two employees or manage to go it alone. But you’re facing the same frustrating business issues every single day. You spend most of your day working and have little to show for it. You own a business that is dependent on your presence and you can forget about taking a day off when you’re sick or want to have a little fun. You feel overwhelmed with the financial aspects of your business and don’t understand why you’re always broke even though you’re making a profit.

Don’t despair, help is on the way. In this book, you will learn:

• How to select the right accountant and get the maximum return from that partnership.

• How to get money from the right places to position your business for success.

• The simple strategy for keeping money moving in and out of your business.

• Why having a budget and keeping good records can mean success or failure.

• How to charge just the right price so customers keep coming back (and bring their friends and neighbors, too!)

• How to squeeze the most out of every business relationship, marketing campaign, lost sale, and business process to maximize the cash available.

I’ve met hundreds of you over the years. And I’m proud to be counted as part of the small business movement in this country. But we have to work a bit smarter if we’re going to survive. I hear countless cries time and again from small business owners who are struggling to survive. When I dig a bit deeper, the solution lies in action. We’ve become an instant answer society. We want a quick fix for everything without doing anything. That’s not going to happen in your business. It’s going to take some work to get it on the right track. You have to be willing to commit the time necessary to do that.

Just about anyone can give you tools to fix your problems. This book is your tool. I’m hoping that it becomes a dog-eared copy lying within your reach on a daily basis until you get on the right track. Although I can’t force you to take action, absolutely nothing different will happen until you do.

When I conducted a survey of more than 200 small business owners, they told me what they wanted to learn about how to manage cash flow. The overarching theme of their comments was help me smooth out the humps in my cash flow. There is no fast and easy way to do that. It takes consistent action in every aspect of the business to make it work. So I focused on the tasks you need to undertake to help you be successful.

Chapter 1, Understanding Cash Flow—Your Number-One Priority, provides a brief overview of the whys behind business cash flow problems. It’s really very simple and describes those things you must understand and what you must look at to begin correcting your cash flow issues.

Chapter 2, Your Business Partner—The Accountant, delves into selecting an accountant for your business. I was surprised when about half of the small business owners who took the survey said they had no accountant. An accountant as the financial expert and partner for a business owner is worth their weight in gold. They can help you take the right actions to grow your business and prevent you from making missteps along the way. But it’s important to take the time to choose correctly. Wasting time with the wrong accountant doesn’t help you a bit. I give you a road map for making just the right choice.

Once you’ve got the right partner on your team, you need to know a little about what they’ll be sharing with you and how to use financial reports to understand what happens to the money in your business. In Chapter 3, How Money Works in Your Business, you learn about the most important financial statements and key accounting terms that are critical for your business.

It’s easy to overlook places where cash could be hiding in your business. In Chapter 4, Finding and Keeping Cash in Your Business, I reveal all the nooks and crannies you can explore to see if you’re missing something. When you’ve found all the cash you can inside your business and are still on the short end of the cash flow stick, looking outside is your best option. You’ll learn about different types of financing available too.

Having a cash flow budget will be a critical key to your success as you move forward. It will help you decide what projects to take on, when you need to slow down cash outflows, and how to make adjustments to the way you do business. Chapter 5, Record Keeping Isn’t Drudge Work; It’s Priceless History, may just become your favorite part of this book. Once you’ve learned how budgeting can be such a useful business resource, you’ll wonder how you ever lived without one.

Have you struggled with pricing your products or services? Most small business owners do. Plenty of them severely undercharge, too. In Chapter 6, Charging the Best Price to Keep Your Business Healthy, you learn what goes into setting a price for what you offer in your business and how to make your customers love paying you. It also helps you take a longer look at your customers and what opportunities you have for their lifetime of doing business with you.

Chapter 7, Using Your Hidden Cash Resources to Grow Your Business, gets into the meat of your business. Sometimes you have to radically change what you do and how you do it to make things work. Process and procedure adjustments can make a big impact. So can having a strategy to make your customers loyal to your business no matter what prices you charge.

Marketing is the lifeblood of your small business. It’s what makes the cash pour in. But it’s not a one-time activity. Using different strategies and tactics to cast the widest net will pay the biggest return for you. In Chapter 8, Marketing—Your Cash Generator, you learn about the various strategies for making the most of your marketing dollars.

OPEN YOUR MIND

One major thing I ask of you as you read this book is to open your mind. As you progress, you’ll be reading about a fitness trainer or a restaurant owner or some other type of business owner and may think, Well, that doesn’t apply to me. Although specific examples are used throughout the book, each of them could apply across any industry in any business. Think bigger.

CHAPTER 1

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Understanding Cash Flow—Your Number-One Priority

A small business owner is working 80 hours a week and he just discovered he doesn’t have enough money in the bank to pay this month’s bills. That’s a story repeated time and again in small businesses around the United States every single day.

Small business owners like you work your fingers to the bone, negotiate the best deals for a huge profit, and have no cash to show for it. It’s not ignorance; it’s just a misunderstanding of the simple steps that must be taken to ensure your business is the success you visualized.

You may be making big profits on the products or services you sell, but that doesn’t mean you’re in good shape. It’s a good thing to have profit in your business, but most important is having cash. Profits don’t equal cash. At any given time your profits can be tied up in inventory or accounts receivable and could be completely inaccessible to you. What really counts in your business is having cash on hand so you can take advantage of opportunities to expand your business and deal with emergencies as they arise.

It’s essential that you understand how cash flow works in your business so you don’t end up sending it in the wrong direction. The basics of cash flow include a few simple items. Cash coming into your business is called revenue, income, or sales. These all mean the same thing. Cash going out of your business is called expenses. These are the bills you have to pay to operate your business like your rent and telephone. You probably already know that income minus expenses equals profit, but what you may not be aware of is that you can’t count on that profit to run your business. Assets are the things that your business owns. You probably have a computer. That would be considered an asset. Any invoices you’ve issued but have not received payment for are also assets. Your company also has liabilities. These are bills that you owe to someone else; money you owe on any credit cards, bank loans, or outstanding bills. Assets minus liabilities equals equity. This is what your business actually owns. If you financed that computer and have paid 50 percent of the bill, you own half of the computer.

So how do you get a handle on what shape your business is in from a cash flow perspective? For starters, you need a good record keeping system. There are plenty of options for accounting software available to small businesses, but that’s not a requirement. If you’re more comfortable keeping your records manually, that’s fine, too.

In your record keeping system, what’s important is knowing how much money people owe you, how much money you owe, and your cash on hand balance. You also need to know the rolled up totals of your income and expenses for each month and year. Financial tracking and reporting is not a once a year event aligned with the ritual of doing your taxes. Businesses that are successful know their financial position and track it on a regular basis. Businesses that aren’t successful don’t. Without fail this has held true in my experience working with small business owners over the years. You simply must know where your business is from a financial perspective.

If you’re having cash flow problems, they more than likely stem from one of four key areas.

1. Your sales aren’t high enough.

2. You’re not collecting money people owe you.

3. You’re not charging enough to cover expenses.

4. You’re spending too much money running your business.

Any of those look familiar? Sometimes cash flow problems in a small business can be attributed to just one of those items. More often, it’s a combination. One thing’s for sure. If you don’t step back and take a look at each of these items, you’ll never know where the problems lie.

WHAT’S THE PROBLEM?

You need to take a systematic approach to each one to find the problem and take action to correct it.

Your Sales Aren’t High Enough

The best way to get more sales is to get more customers or sell more to the customers you currently have. The only way to do that is by using a consistent marketing strategy that targets the right people for your product or service. You absolutely must have a marketing strategy for your business and a tracking system that tells you what’s working and what’s not. There are numerous ways to market your business and increase your sales. How you do that depends on your business services and the customer you are targeting.

You’re Not Collecting What People Owe You

It’s really easy to get so caught up in the work of your business that you forget to bill for your services or forget to track what you’re owed. But the simple truth is you must. Your survival depends on it. If you do work and don’t get paid, what have you gained? Nothing except a bunch of lost hours. You don’t have time for that. You simply must have systems in place for making sure you get what is due to you.

You’re Not Charging Enough to Cover Expenses

One thing a small business cannot do is compete on price. Just ask all those small business owners who tried to compete on price with Wal-Mart. You don’t have the same buying power as the giants. What you do have is the capability to appeal to a different segment of the market by making sure you offer extra value for the price they pay. That way you can calculate your price to make sure each and every expense is covered with some left over for your good work.

You’re Spending Too Much Money Running Your Business

Running your business isn’t all about paying bills. How your business operates contributes in a big way to what you end up with as your bottom line. Whether you have employees or outsource some of your work to contractors, how that