If you run a small business, chances are good you’re an expert at what your business offers. What you may not be an expert about, however, is the cash flow management and budgeting required to successfully manage a small business.
One of the most important aspects of budgeting involves estimating and matching expenses to revenue so that your small business always has enough money to operate, pay employees, take advantage of opportunities, expand and generate revenue. Following are some important aspects of budgeting and managing cash flow.
Establish a Budget
Many small businesses tend to run their budgets somewhat informally, particularly during the startup process. There will come a time, however, when it’s time to copy industry best practices and draw up a formal budget. To get started, look to industry standards to estimate the average costs of doing business (you may already have a good handle on this from your startup phase), and create a spreadsheet estimating the amount of money you’ll need to allocate toward your costs. Factor in enough to cover unexpected costs and review your budget every few months to be certain it’s matching the reality of your business. Small business bookkeeping solutions such as QuickBooks can help make the process less painful.
Pay Bills at the Right Time
Are you paying bills the moment the invoices come in? While this may make you feel financially secure, it’s not necessarily a good strategy. If you’ve left yourself low on cash reserves, you may not be in a good place if something unexpected happens. Instead, extend your payables as long as possible and spread out your payments. This way, you’ll avoid draining your cash reserves, which could jeopardize your relationships with suppliers if the unexpected happened and you were unable to pay. It’s a good idea to sort invoices according to priority, and schedule staggered payment dates so the most important bills are paid first. If certain payables don’t fit well with your budget, see if you can’t renegotiate payment terms with the vendor.
Reevaluate Your Payroll Cycle
We all do it: a paycheck comes in and we’re flush, pay all the bills at once, and then we’re cash-poor for the last week of the month. Since your biggest expense is likely payroll, be sure you’re scheduling payday at a time that best fits your revenue stream so you’re not leaving yourself limping after you pay your workers. Alternatively, you can negotiate with creditors for different payment timelines.
Keep Your Receivables Lively
Many small businesses suffer from slow payment for goods or services rendered. Consider putting some effort into your accounts receivable practices by implementing strategies that speed up payment. This may include offering discounts or other benefits for customers who pay quickly or switching to online payment services (if you don’t offer them already), which can eliminate administrative delays. If you’ve been burned in the past by late-paying customers, it may be worthwhile to implement a strategy of taking deposits from customers before the work starts.
Establish a Line of Credit
Lines of credit (LOCs) are a great tool for small business owners that wish to budget and manage cash flow better. Unlike a loan, LOCs allow you to withdraw money when you need it (as opposed to a large lump sum at the beginning). If your cash reserves get low and you are passing on opportunities that require working capital, a line of credit is a great option for you to be able to manage your small business finances better without the need to commit to a large loan.
Hire a Professional
To learn more about managing cash flow and budgeting for your small business, consult with a professional. DOAAR is a small business bookkeeping, tax, and consulting services firm, with an additional focus on its client’s personal finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end close, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients with a powerful and fully integrated back-office accounting solution. We have locations throughout California and the rest of the U.S. Visit our website for more information or to contact us.