One of the most challenging aspects of running a small business is being responsible for your own income. Follow these tips for managing cash flow.
Gone are the days of the steady paycheck and its bi-weekly deposits into your bank account. Instead, it’s up to you to make the right decisions with payments as they come in. Easy to do when you’ve got a steady stream of invoices flowing out; not so much when you hit a slow patch.
Meanwhile, you’ve also got to be mindful of income’s close cousin—expenses. Business and personal commitments (rent/mortgage, phone, transportation, food, etc.) do not stop just because you’re in a low-volume slump.
In the accounting world, all of this is called cash flow: “The amount of cash moving into (income) and out of (expenses) a business.” Conquering it requires discipline and strategy.
We picked the brains of our panel of successful small business owners to find out how they manage the ins and outs of cash flow.
Track Your Income and Expenses
It might seem simple, but managing cash flow begins with keeping an eye on your accounting—and not just at tax time. All the time. When you have a clear line of sight to what you’re bringing in and what you’re spending, you can make real-time changes to better balance the two.
Cloud accounting software will organize the information for you and provide an at-a-glance view of what’s going out and what’s coming in. The trick is to send invoices promptly and input expenses regularly.
Andrew Campbell, workshop trainer and agricultural speaker, says the secret to staying out of the red is to always be aware of the patterns that contribute to cash flow.
“A steady flow of money coming in is critical. Identifying trends throughout the year can help. When was income high? When was it low? Can you make the highs higher? What about the lows; why is it that way and what can you do about it?
“Because we are a bit seasonal, we always have to watch cash flow in the early fall. We book a lot of plane tickets, but don’t get paid until after the job is done. Watching that there is enough to do that is important.”
As our popular eBook Your Guide to Mastering Cash Flow in Your Small Business advises: “When you track your income and your expenses as you go, you can see exactly where your business stands and make adjustments accordingly. If you’ve determined that you’re in the red, you may decide that equipment upgrade isn’t the best idea after all. If you’re in the black or the green, you can confidently invest in that professional development opportunity you’ve had your eye on. Either way, you won’t know for sure unless you track.”
Create a Profit and Loss Report
Want to understand your cash flow and know how your business is performing over the course of a year or a quarter? Of course you do! When you analyze your profit and loss regularly, you can do things like look for ways to minimize expenses and identify what times of the year are the slowest so you know when to amp up your sales efforts to even things out.
A basic profit and loss (P&L) report tallies your income and expenses over a given amount of time (i.e., monthly, quarterly or annually). If at the end of the chosen period, you’ve spent more than you’ve made, you know you’ll need to make changes—and where.
Writer and Communications Consultant Paul Russell says he’s learned the hard way to mitigate those lean times by stretching out large, lump sum payments.
“My greatest cash flow learning event relates to retainers. I’ve had a few in my time (where I’m pre-paid a large amount and then bill against this amount). I’ve learned to put the pre-paid amount in a separate business savings account, and transfer amounts in my main business account only as I do the work.
“For my first retainer, I withdraw a large chunk of it right away, then suffered through a cash flow crunch for months after since little new money was coming in. Lesson learned.”
Suzanne Colmer, image and style consultant, employs the same saving method to ensure a balanced income even when her workload fluctuates. “If you have a fantastic month (or months), it’s smart to put some of that money away if you’re tempted to spend it all so that you have a cushion during leaner months.”
Control Your Income and Expenses
When you understand where you could stand to improve—whether that’s working on increasing your income, cutting back on expenses or both—you can make a big-picture plan for the long-term success of your business.
That might include activities like:
Income-Boosting • Targeting higher-value clients
- Taking on more work
- Doing more marketing
- Raising your rates
- Upselling existing clients
- Developing an off-season niche
- Making cutbacks on phone plans, transportation, entertainment and other expenses
- Avoiding credit and loans
- Buying gently used equipment
- Renegotiating lending terms
- Creating and sticking to a business budget
- Working from home, the library or other free places where you’re not tempted to spend money
Take the Long View
Information is power, but seeing the truth about your cash flow in the short-term can also be discouraging. While it’s important to act quickly and strategically when you see that you’re unbalanced, going into Energizer Bunny mode won’t immediately fix the problems either.
Digital strategy consultant and trainer Tim Dolan reminds small business owners that success takes a long time to unfold and making plans for long-term success
“Force yourself to take a longer-term view on meeting revenue targets. Don’t try to make every moment of every day billable. Give yourself some longer term targets – monthly or quarterly – and some flexibility in how you make your numbers. Thinking short-term in maximizing daily billable hours will lead to missed opportunities (and higher blood pressure).”