As you well know when it comes to money, small businesses have a pretty small margin for error. It’s important to keep a close eye on your finances. But so many small business owners grew their businesses by being good at what they do…and that thing is not necessarily at accounting or finance. So what are the important things to keep an eye on? In this post I wanted to focus on just a few. So, here are some areas that a small business owner ALWAYS has to keep a sharp eye on:
Without cash it all comes to a halt. Maybe not today or tomorrow, but soon. Trust me. Keep a close eye on how much cash the business has – and the direction and source of your cash flows. Many small business owners watch the profit and loss statement. They especially like to watch sales/revenues. And, yes, that’s important. (We’ll get to that in a minute.) But cash IS truly king.
You can’t forget to look ahead also. Forecast your future cash needs to make sure you have enough cash to handle the expenses you anticipate (the typical expenses your business typically generates) AND those you don’t expect. Have extra cash available for those surprise expenses that seem to appear all the time. Sometimes it’s additional expenses you didn’t anticipate – a vendor price increase, a broken machine, a mistake with a customer that has to be rectified. I don’t have to tell you, there are all sorts of these that can pop up out if nowhere. Sometimes it’s a business opportunity that you want to take advantage of. Sometimes there’s an opportunity to accept a special offer or do some additional marketing/advertising. You want some ready cash available to do these.
BUDGET – AND ACTUAL VS. BUDGET
I’ve seen situations in which organizations look at their revenues and even their profit and loss and feel good about what they’ve accomplished. My response to them is “Good. So how does that measure up against what you expected to do?”. Sometimes that gets met with stares or even annoyance that I dared to ask that question. It’s a valid question. If your revenues are growing by 5% year-over-year you might feel positive, right? But what if the industry is growing more quickly? What if you could have grown by 15-20%? What if you expected faster growth or higher profitability? Would you still feel good about your results? You need to know where you are vs. expectations.
If you wait until the end of the year to see how you did it’s too late. Looking at the results for a whole year is way too broad. It’s important to look at results as the year progresses, so you can spot any problem areas early and adjust as needed. And it keeps your team informed as the year goes on. It’s an objective way to have everyone know how the year is progressing and if goals are being achieved. It’s a very good habit to get yourself into.
A/R AND A/P
I’ve seen several times that small business owners (in businesses that aren’t purely cash-based) are not watching their receivables closely enough. Before too long – especially in a difficult economy – things start slipping. Those that owe you money are paying slower and slower. And, yes, maybe you are doing the same to your vendors.
Accounts receivable (how much money your company is owed) is critical to watch for cash management purposes. You really have to have a process in place to handle accounts receivable aging. Many companies don’t. At what point do you turn up the heat on getting paid? What do you do at 30 days? At 45 days? At 60? 90? Are you clear about the terms when you sign up a new customer or client? And then you must follow-through. Several times I’ve seen companies with a process that they don’t follow. What good is that? One great way to run out of cash is to stop paying attention to receivables.
On the other hand, you might wonder why you should be concerned about your payables (the amount you owe others). Well, payables are debts you owe. They don’t disappear just because you ignore them. They simply build up over time. And the bigger issue over time is that you start to hurt your reputation and your credit-worthiness. New vendors will check your credit when deciding what terms (if any) to offer you. Banks and other investors pay close attention to your ability and willingness to pay. Getting behind on payables is an indicator that you may not have a tight handle on the way you operate your business or that you have difficulty forecasting. Over-extending your payables might save a little bit in the short-term…and cost you big-time over the medium- and long-term. It’s not worth it.
LONGER-TERM CAPITAL NEEDS
And speaking of the long-term and your ability to finance it, let’s be strategic for a moment. As you think about your company’s future you need to consider what investments you will need to make to get there. Will you be building a new location or office(s)? Will you need new equipment? Your growth might be something you can fund from the business’s operations. But often there are needs beyond what you can generate that way. In that case you need to seek out additional funding. That could be investors, a business loan, or even more money put into the business from the owners.
But knowing these needs require planning and strategic thinking. Outline your capital needs over time and carefully consider how you will plan to raise that money.
Now I know we didn’t go into our businesses to get bogged down in admin and accounting crud. But it’s part of the deal. It’s really something you have to manage. Know where your business stands. Know what you want to achieve and whether it’s all moving in the right direction. Part of that is managing the financial side of the business.
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