Posted by Parveen Dhupar on February 4, 2018
What does it take to be a small business owner?
This is a question I have been asked many times over the past 25 years being an entrepreneur. While motivation, drive, and perseverance sound glamourous and immediately come to mind, one of the most important tests in being a small business owner came to be in the form of many small lessons learned over the years and they all had one thing in common – cash flow.
This brings us to part three of this series – What Keeps Entrepreneurs Up At Night? Managing cash flow for small businesses. What can we, as business owners do to avoid the pitfalls of unbalanced cash flow? After all, running out of money is one of the main reasons businesses don’t make it past their first year.
Managing cash flow can be broken down into three crucial stages – setting your business up for success, consistent nurturing and planning and finally, steps to stay on track.
Set Your Business Up For Success
When it comes to being an entrepreneur, talking and learning about cash flow is not exactly an adrenaline rush, but it should be a prerequisite to starting any kind of business. Knowing how to manage cash flow is part of the process of building a healthy business – so while the gears are turning on the other aspects of building your business, set aside some time to learn. Surrounding yourself with strong partners (bankers, accountants and consultants) is an important part of this – a team who can give you great advice is an asset. You can start by asking some very simple questions:
• What are my monthly expenses?
• What do I need to break even?
• When do I need to borrow?
• Do I need a line of credit?
By answering these questions, you are already ahead of the many business owners who first consider cash flow only when they are already in trouble.
Nurturing and Planning
Why does managing cash flow become a problem in the first place?
For most, the problem isn’t the cash itself; it’s the inconsistency that comes along with it. A late or missed invoice could mean sacrifices for your business and team, and that is risky.
According to Shegar Thirumalai, a serial entrepreneur and owner of a San Diego-based security company, all businesses should seek out working capital before there is even a need. “Even if I don’t need it now, I will always have a reserve,” he said to Entrepreneur Magazine.
The key to avoiding a cash flow situation once your business is up and running starts with setting a budget and making a reserve fund a priority. Stalls in cash flow are likely, so being proactive and having a plan is important. By having a “cash cushion” you can be prepared for a slow month, unforeseen interruptions or staff issues. A good rule of thumb is to always have a minimum of three months’ cash on hand to cover all expenses.
Staying On Track
With proper planning and consistent maintenance, your business can quickly become an efficient and responsible cash flow machine. But staying on track means always asking what more can be done in addition to reviewing statements monthly. Here are some of the ideas that inspired me:
• Provide an incentive for early or cash payments
• Implement penalties for late payments
• Reign in unnecessary spending before you need to
• Conduct annual or bi-annual revenue forecasting
• Invest in accounting software that makes sense for your business
Whether you are a seasoned entrepreneur or you are thinking about starting your first business, an investment in understanding cash flow could be the difference between a thriving business and a bump in the road turning into a disaster. As entrepreneurs, being one step ahead of these types of problems means innovation and forward thinking in every element of our business. Cash flow is a necessary pain point for many of us, but by managing it successfully, you have mastered one of the most important lessons in being a successful business owner.
What keeps you up at night? Let's talk!