| Managing cash flow is every small business owner's | | | | customers owe you) would be paid just in time for you |
| most important function. Avoid these seven deadly | | | | to pay your payables (what you owe your vendors). |
| mistakes to make sure you aren't creating cash flow | | | | But, if you're a small business owner you know Rule #1 |
| problems in your business. | | | | is "Stuff Happens". The customer you thought would |
| 1. Using the "Fly By The Seat of Your Pants" | | | | pay his bill this week, doesn't. So the bills you thought |
| Accounting Method. | | | | you could pay this week, don't get paid. |
| When tax time rolls around do you find yourself | | | | Are your Payables in balance with you Receivables? If |
| pawing through piles of paper on your desk looking for | | | | what you owe to others is far more than what is |
| credit card receipts from your business trip? Or are | | | | owed to you, then, Houston, you have a problem. |
| you upside down digging under the seat of your car | | | | And it's not just the balance that's important, it's the |
| trying to figure out where all your gas receipts are? | | | | quality as well. If your receivables are as old as your |
| Are you wondering if that coffee stained piece of | | | | Aunt Tilly, chances are good you'll never see the cash. |
| paper is an invoice from a supplier? Do you have a | | | | 5. Focusing on profit instead of cash flow. |
| vague feeling that someone, somewhere owes you | | | | Ahh, Profit. The ultimate goal of every business. Or is |
| money but, you just can't remember who it is? If so, | | | | it? Did you know that many businesses that fail are |
| you're probably guilty of operating with the "Fly By the | | | | operating at a profit? How can that be? For the small |
| Seat of Your Pants" accounting method. | | | | business, cash flow is the ultimate goal. No cash flow. |
| Using this accounting method has a tremendous | | | | No business. Period. |
| impact on your business's cash flow. Unless you have | | | | What's the difference? Mostly the difference is in the |
| a system to track your business finances, you'll always | | | | decision making process. "If I take on this big job, it will |
| be operating in the dark and in danger of imitating | | | | earn me a huge profit, but if I take on five smaller jobs, |
| George of the Jungle as he slams into a tree. | | | | I'll have cash to pay my bills." Yes, you want to be |
| 2. Not Knowing What the Numbers Are All About. | | | | profitable but every decision has to be measured |
| Once you have a real honest to goodness useful | | | | against the effect it will have on cash flow. |
| accounting system that's where the real fun starts. | | | | 6. Forgetting your debt to society. |
| You've got a bunch of numbers but what in the world | | | | Some bills are easy to forget. Bills like sales tax, payroll |
| do you do with them? | | | | taxes, estimated taxes. They sort of sit out there, |
| Understanding what the numbers mean is crucial to | | | | almost off the radar screen. They don't have to be |
| your cash flow. Are sales trending up or down? Are | | | | paid right away. It's easy to forget them until BAM! |
| expenses rising faster than sales? Is one product | | | | they're due and they're due right now. And you better |
| more profitable or better selling than another? How | | | | have the money to pay them or you're in hot water |
| much do I need to sell to meet expenses each month? | | | | with the Tax Man. That's not a place anyone wants to |
| Can I take a paycheck this month? The answers all lie | | | | be. Pay them late or not at all and you end up with |
| in the numbers. | | | | penalties and interest on top of what's already due. |
| 3. Mismanaging Credit: I Owe You, You Owe Me. | | | | Cash flow problems result as you rob Peter to pay |
| There are two ways to mismanage credit in small | | | | Paul. It can take months or even years to recover. |
| business: | | | | 7. Spending your company's future on a speed boat. |
| 1. Granting credit without wise credit policies | | | | Haven't you always wanted a speed boat? Or a |
| 2. Using credit with no plan of how to pay the bill. | | | | fancy car? Or an all expense paid trip to the |
| Both have a huge impact on your cash flow and are | | | | Bahamas? It might be tempting to try to pass your |
| often closely related. Here's a scenario to demonstrate | | | | personal purchases off as tax deductible business |
| that point. You have an opportunity to work on a big | | | | expenses. But, it's a bad idea for two reasons. |
| project but to do the project you need to order | | | | The folks who work at the IRS are over-worked but |
| materials. So, you order materials from a supplier who | | | | they're not stupid. The last thing you need is an audit. |
| expects payment in 30 days but you won't receive | | | | An audit that could reveal your transgressions and |
| cash for the project for 60 days (or 90). Immediately | | | | could result in an unexpected tax bill plus penalties and |
| you've put yourself into a cash flow crunch that could | | | | interest. Again, huge cash flow headache! |
| take months or years to recover from financially. In the | | | | Here's the other reason it's a bad idea. Are you |
| meantime you've passed on smaller jobs that would | | | | spending your company's future on frivolous or |
| have provided quicker cash at less cost. And, if you're | | | | unnecessary expenses? Small businesses operate |
| not able to come up with the cash for your supplier, | | | | close to the edge. Unless you have a reserve to see |
| you've endangered that relationship as well. | | | | you through the tough times, you're always in danger |
| 4. Ignoring the relationship between Receivables and | | | | of being on the wrong side of that edge. You've got to |
| Payables. | | | | take care of the golden egg laying goose first. Then, |
| Do your Receivables and Payables "play nice" with | | | | you can pay yourself a properly taxed bonus and buy |
| each other? In a perfect world your receivables (what | | | | all the toys you want. |