Cash Flow for Small Businesses

Last week I talked about “What about the cloud?”  If you missed that post, you can review it HERE.  This week’s post is “Cash Flow for Small Businesses.”  Lack of cash is a common reason that small businesses fail.  Being able to predict your cash balances helps you manage your business's finances.   Learn more in this week’s blog.

Making money is one of the reasons that everyone goes into business.  It may not be the primary reason, but because we live in an economic world, you have to make money to function.  No one goes into business to see how much money they can lose.  Yet, many small businesses fail because of money issues.  Even non-profit businesses need to generate money or they will not be in business very long.  So while cash flow may not be a very exciting topic, it certainly is an important topic.

Today we are focusing on how failing to manage your cash is a reason that many businesses fail.  Let’s look at some of those reasons. 

One reason small business fail is that they didn’t have enough money to get themselves through the start up period.  There are several reasons for this.  No realistic budget, or no budget, was prepared when the business began.  The owner didn’t understand how their business worked when they prepared their initial budget.  They owner didn’t understand how cash came in and went out of their business.  They needed a good budget and realistic expectations for their business.

Failing to plan properly is another financial reason small businesses fail.  This sounds like a non-financial reason, but it has a big financial component to it.  If you don’t take the time to develop a well prepared budget, you haven’t planned your finances for the year. 

Expanding your business too fast without good budget projections is another planning failure.  It is easy to get caught up in the excitement of taking on something new, without realizing how much time, money and energy it takes to expand. 

Small business owners are naturally optimistic about their business.  That is part of what allows them to take the risk in the first place.  But when you are doing financial projections, you also have to look at worst case scenarios so you are properly prepared financially for what might happen.  That way you can work toward your goal, the optimistic projection, but be financially prepared if your projections are off.

Failing to keep financial track of your business on a monthly basis is another financial reason that many businesses fail.   It is important to do your books every month when you are in business.  This is an important function that many small business owners wait too long to seek help with or overestimate their ability to complete.  You can’t make good financial decisions without knowing the state of your finances.  You have to do your books monthly to do that.

Overspending is another reason that small businesses fail.  When you don’t do your books regularly and don’t have a well prepared budget to remind you of your upcoming expenses, you don’t really know what you have available to spend.  If you have an annually billed payment coming up next month, you don’t want to spend the money this month on something else that could have waited.  Your budget helps you remember these expenses.

This is a sample of the kind of issues that get small businesses into financial issues.  These are the kind of issues that you want to avoid.

There are several keys that you have to address to help you deal with your cash flow and budgeting issues. 

• You have to know where you are. Either do your bookwork or have it prepared every month.  This shows you what has happened and helps you prepare your well thought out budget.
• You have to know what is coming up, including your bills that you don’t have to pay every month. You can do this by preparing a well thought out budget every year for your business.  This is especially important when you start a new business.
• You have to know how much money you are going to need every month. You can do this by preparing cash flow projections with your annual budget and updating them as needed.

When you take care of these financial keys, you will have the information you need to make good decisions that give your business the best chance to succeed.

Over the next few weeks, I will be expanding on how you can address the issues and keys I have introduced in today’s post. 

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God Bless your week!