For small business owners, cash flow is equivalent to blood flow. When it is flowing well without hiccups the system (business) works just fine. You spend cash buying inventory, leasing equipment, making repairs or doing anything else that will help produce goods and services that you can sell to customers and receive cash in return. This cash can then be deployed again for the abovementioned purpose and the cycle continues. Hopefully, you are receiving more cash than spending it, resulting in positive cash flow.
If you are like most small business owners you don’t pay enough attention to saving for the long-term. After all, when you can invest money in your own business and get higher return than saving at a bank why wouldn’t you reinvest in your business instead of saving it. Many business owners do not even keep their personal and business finances separate. Their accounts and expenses are intertwined moving money from personal to business and vice versa all the time.
This could be a big mistake. As much as you would like to invest your money back in the business this can create number of issues potentially not only impacting you, but your family too. First of all, if something goes wrong with the business you could lose it all with no rainy day fund to tap into. The tax authorities will also come down hard in audits if you cannot show how your personal and business finances are kept separate.
If you have not paid much attention to business credit the time to do it is now. For small business owners, business credit is like a lifeline, an insurance against unexpected expenses that might come out of nowhere. Business credit gives you peace of mind with the knowledge that you will not have to scramble to borrow money on a short notice to meet emergency financial obligation.
Look no further than what Ford did before the great recession of 2009 hit the world. Ford had established a huge line of credit by mortgaging pretty much everything they had, including their namesake blue logo! When recession did arise and all the banks shut their doors to business loans Ford could borrow from the line of credit and continue investing for the future. When both, GM and Chrysler, filed for bankruptcy protection, Ford was not only able to avoid it, but position itself to take advantage of upturn.
Unless you have been hiding in a cave for the last couple of years you know Greece is on the verge of economic collapse on the scale not seen before. The unemployment rate is a staggering 22% and they are expected to default on their loans unless they receive yet another round of financial help from their neighbors and EU partners.
While it may be tempting to think of Greek situation as unique, it is not far-fetched to think of an analogous scenario for small businesses. After all, as we show below the reasons behind Greek crisis are prevalent in many of the businesses – both large and small. That’s why Greek crisis holds important lessons for business owners in how not to get into the financial disaster. Below is our attempt to explore reasons behind Greece’s failure and how they apply to small business owners.
Majority of small businesses fail in the first three years. As remarkable as this statistic is, it doesn’t stop number of aspiring entrepreneurs from pursuing their dream of owning a business. They think about their idea as the best thing since sliced bread was invented and are convinced that there is a huge untapped market out there that nobody as cracked. They have run their idea by close confidants and got their endorsement. Uncle Bob likes their product and Aunt Ann can’t wait to get her hand on it. There is only one problem. It is still an idea in your head!!!
So how do you go past this “pie in the sky” idea stage and make it a reality? Even more important, how do you know that this idea will succeed and will not leave you with agony and angst when it’s all over?
Cash flow is a lifeblood for small business. Fail to plan properly for the month-end cash flow needs and you will start losing your sleep when the time arrives to write paychecks for employees or to pay vendor bills. That’s why it is very important to keep a keen eye on money coming in and going out, and plan for those times when you will need sizeable cash outflow. Not only that, but you have to take into account unexpected emergencies that will force you to spend money here and now. In earlier post, we showed how managing your inventory, account payables and receivables can help you better manage your cash flow.
In addition to those tips, you should also look at the obvious as well as not-so-easy-to-find ways in which small business owners squander cash and end up in dire situations. Here are examples of the mistakes many small business owners make and how you can avoid them.
Cash flow management is one of the most important tasks small business owners need to pay attention to. If you are not paying attention to how your business generates and spends cash you may end up in real trouble, real fast. Cash flow management touches many parts of business, including inventory management, accounts payable, accounts receivable and so on. Below we provide you with insights that will help manage your cash flow better.