The following was written by a guest blogger, Eleanor Wyatt.
Whether your business is a $10 lemonade stand or a $1,000,000 tech venture, positive cash flow is intertwined with long-term success. But reaching and maintaining healthy incomings/outgoings is not always easy and, in fact, becomes a lot harder as your business grows. That’s why it’s important, whilst your operations are small, to develop good habits you can use in the years to come.
It’s hard to make necessary changes to your work processes if you don’t have a clear overview of inflows and outflows. At any moment, you’ll need to know your expense costs, inventory quantities, active projects, due invoices, fixed assets, and more so that you can accurately calculate cash flow and use your findings to build an airtight financial plan moving forward. Even if you’re a full-time entrepreneur/business owner, it will pay to spend some time building a working knowledge of accountancy.
Once you’ve dug out your bank statements, calculated your overheads, and collected together all of your contracts, the next step is to quantify and store this information. If you haven’t already, it’s never too early to invest in accounting software. You can use this software to help track times, build reports, create and monitor invoices, and store receipts. Try to look for software that are suitably designed for small businesses and that you think you’ll be able to understand and operate independently.
Even when things are running smoothly, a savvy business owner is always looking to cut costs where possible. The best and perhaps the easiest way of doing this is to aim attention at recurring costs like subscriptions, office supplies, utility bills, insurance plans, or loans. For example, with the popularization of remote working, it’s possible to skip a hefty office contract entirely and conduct all business from home or in shared spaces.
Remember, even though it’s important to save money, you need to be careful how you go about doing this. One of the common mistakes when reviewing your budget is to slash marketing or advertising. This can be tempting for a business, especially during a recession, but oftentimes the value of marketing is multiplied in more difficult economic circumstances. Instead, consider adapting your processes - for example, you might try and utilize cost-efficient strategies such as PPC or paid social, rather than expensive ad campaigns or spending through an agency.
Adapting Your Business
Sometimes, to get to a positive cash flow, it’s necessary to make profound changes not just to your work practices but to the business itself. Using a sole proprietorship, for example, you can usually enjoy reduced tax rates (as there will be no legal separation between you and your business). Starting a new business as a sole proprietorship will also save you on legal costs, as these will no longer pertain to state registration or obtaining an agent. Remember, before you take any major steps, it’s always a good idea to find an experienced financial advisor first.
Another common strategy is to move everything to the digital space. Most businesses founded in the 2010s were either digital or have transitioned online. This is a major advantage for erasing geographical limitations, improving your reach across consumers, and, of course, saving cash on personnel and illiquid assets. Even though it’s an easy adjustment, you should make sure you’ve done plenty of research before you buy a domain or spend on online services.
Recent studies found that 29% of businesses fail due to a lack of cash. If you can’t pay salaries, suppliers, or afford the resources you need to operate as normal, your business simply can’t function. Keeping strict cash management is essential, not just to the working of your business, but also to its long-term future.