As an entrepreneur, you want your business to be as successful as possible. You have dreams of making it big - reaping the rewards of all of your effort and hard work.
Unfortunately, if you’re having trouble with your cash flow, you may be headed for disaster without realizing it. Today I want to talk about this aspect of your business and show you how to steer the ship in the right direction. Don’t be the Titanic, be its sister ship, the Olympic (look it up).
Think about cash flow like balancing your checkbook (if you’re one of the five people left who do that). If you’re not sure where your money’s going, chances are it’s not going anywhere good.
Why Cash Flow is Important
To put things into perspective, 82% of businesses fail because of poor cash flow. Don’t become a part of that statistic.
I understand why many entrepreneurs don’t focus their attention on this subject. It’s dull and boring, and it can create much stress if you’re not moving in the right (read: profitable) direction. I used to be this way, but once I realized that marketing and sales weren’t going to fix my cash flow issues, I had to do something about it.
So, let’s look at how cash flow can make or break your business, shall we? Here are seven signs you may be headed towards the proverbial iceberg, and how you can steer away from it (thus saving Jack!).
Expenses Exceed Income
Once you’ve crossed over the “new enterprise” phase of your business, you have to make sure that you’re earning more than you’re spending. At first, this is normal while you’re still finding your customer base, but after a while, something has to give. Even if your profits are barely in the single digits, that’s much better than being negative.
Pro Tip: God is in the details, and your success is too. By being organized and detailed down to the penny (or dollar, at least), you’ll have a much easier time figuring out if cash is flowing in or out.
You Can Meet Payroll
Your employees make your business run smoothly, but they can’t work for promises and gratitude (even if you can). Thus, you have to make sure that they’re taken care of each month, lest you spark a revolt from your staff. If you find yourself getting close to a “Les Mis” situation on a regular basis, you need to get your cash flow back on track.
Pro Tip: Payroll is going to be your most significant expense, but it shouldn’t be more than 50% of your earnings for many industries. Overall, pay attention to the percentage more than the dollar amount, and make adjustments accordingly.
You're Late With Creditors
Borrowing money may be part of the business strategy, but the challenge is paying it back. Once you’ve found your footing, you should be able to pay your creditors each month. If not, then the damage could be more interest, higher fees, and a lower credit score.
Pro Tip: Your credit score is going to help you grow your business, so it’s kind of important. Thus, you’ll want to make on-time payments with as many creditors as possible. Also, don’t be afraid to open up and build some relationships as well. Creditors are human, too, which means they can be lenient if you establish a rapport with them early on.
You're Using Personal Money for Business Expenses
Sure, when you’re first starting out, all of your money is “our” money (we being the company), but after a while, you need to become independent. If you’re still cutting personal checks with the kittens on them for business expenses, your cash flow is probably in bad shape.
Pro Tip: I can’t say for sure that this will never happen, but if it does, create a separate account for business expenses so that your money doesn’t get mixed in and muddy your personal finances. This will make taxes easier (trust me).
You're Not Getting Paid Quickly
You want to be friendly and accommodating to your vendors and customers, but at some point, you gotta get paid. Remember Rihanna’s song, Bxxxx Better Have My Money. If you’re not collecting the money you should be on time, you may need to start getting tough. While I’m not suggesting breaking legs or anything, late fees are an excellent start.
Pro Tip: It can feel a bit gauche to talk about money, but it’s business, not personal. Establish terms with your vendors and clients beforehand so that you’re both on the same page. Also, getting these things in writing will enable you to charge fees without feeling bad, so that’s another bonus.
Uncle Sam will always want his cut, and you don’t want him breathing down your neck. You may have several monkeys on your company’s back, but the IRS shouldn’t be one of them. You have to make sure you’re handling your taxes well because this will give you peace of mind, which is worth its weight in gold.
Pro Tip: Hire a bookkeeper and accountant! Even if you’re a certified CPA, you have enough on your plate already. Get a pro to handle your books and your taxes for you.
Most of us have debt, and your business is no exception. However, the goal is to get that number to shrink, or ideally to zero, not grow bigger. If you’re feeding your debt instead of starving it, you need to put your company on a strict diet.
Pro Tip: Set alerts on your credit cards to notify when you’re going over a certain limit. This will help you stay on track and avoid fattening up your interest rates.
About the Author: Michele Thompson Rosario, CEO of Bright Effects, helping entrepreneurs get clients, get traffic, and get results.