Approximately 82% of small businesses that fail do so as a result of poor cash flow management — or a complete lack of understanding of cash flow.
So how can business owners prepare themselves and avoid becoming a failed statistic? As someone who has helped companies manage and grow their finances to upwards of eight figures, I offer a few tips:
- Create a detailed budget. Do this at the beginning of each year and update it monthly. Account for all potential income and all potential expenses. Always maintain an emergency fund for any unexpected occurrences and have a line of credit to draw on when needed.
- Forecast cash flow. Avoid surprises by creating a rolling 13-week cash flow forecast. Monitor and adjust it weekly to ensure liquidity. Be strategic by following up on late payments quickly or doing things like offering discounts for early payments.
- Track expenses. It’s essential to know what is going out of the bank, just as much as it is to know what’s going in. Differentiate between essential and non-essential expenses, automate as much as possible to reduce operational costs, and negotiate with suppliers to obtain better deals.
- Maintain accurate bookkeeping. One of the easiest things to delegate is accounting by using software (e.g., QuickBooks) and/or by hiring someone to manage it. This frees up the business owner’s time to focus on core competencies and other items that will move the needle. Bank and credit statements should also be reconciled monthly, along with profit and loss reporting. Business owners should know their debt-to-equity ratio.
These are just a few things that can get a business on the path to financial success. However, it’s just as important to avoid debt, pay taxes, file returns and have legal contracts in place to protect against any potential financial disputes.
Marcia Ritter is founder and president of NexFaze, a Scottsdale-based accounting and finance firm.
