82% of small businesses fail because of cash flow problems. Proper financial management is the key to ensuring that your business is in the 18% minority.
The cruel truth about entrepreneurship is that 31.8% of small businesses go bust in their first year. 50% fail before their fifth birthday. The reason? Most small businesses fail due to cash flow problems. They run out of money!
The good news is that if you're a business owner, then you can easily avoid such an eventuality by properly managing your finances. Here's how:
Good cash flow management
Your cash flow is the total amount of money coming into and going out of your business. It's usually affected by many things, one of the most important being your pricing strategy.
If you underprice your goods or services, then you won't have enough cash flowing in. On the other hand, overpricing may push you out of business because you won't make enough sales. So you want to price yourself at that sweet spot where you'll be competitive enough without having to work too hard for little pay.
It would help if you also had a good billing strategy to ensure that money actually flows into the business. If you have lots of cash tied up in unpaid invoices, then you may lack the liquidity to stay afloat. If you are facing issues with billing, try to encourage your clients and customers to pay on time by offering time-based discounts.
You can, for example, introduce terms like 2/10 Net 30. In such a case, a customer receives a 2% discount when they pay an invoice within 10 days. Otherwise, the full amount is due in 30 days.
Don't forget to create a budget, which is much easier to do if you have a dedicated small business checking account. For one, it will help you to track your income and expenses. Secondly, you can use the budget to set a revenue line and a ceiling for expenses. By doing so, you'll ensure that your business always has some operating cash.
Use affordable credit
Contrary to what many small business owners think, credit is not a bad thing when used responsibly. An influx of loan capital can help you acquire equipment, hire more people, meet payroll needs, pay utility bills, and so on. Ultimately, a good line of credit will keep you operational until your invoices are paid.
The trick lies in choosing an affordable credit product for your business. For example, traditional banks typically charge high-interest rates. In addition, you'll also be obliged to pay origination fees, processing fees, packaging fees, NSF fees, late payment fees, prepayment penalties, and so on. These charges make bank loans costly for small businesses. Therefore, it’s important to compare alternative sources of business financing to see what would work best for your situation.
Implement saving techniques
There are several ways that a small business can save some cash. Top on the list is running a separate checking account for the business; this makes it easy to separate your business and personal expenses. Additionally, it's essential to monitor accounting books; you can use accounting software such as QuickBooks to help you keep track of this.
Reviewing things like income and expenditure records will help you understand your expenses and avoid wasteful spending. Finally, evaluate each expense and whether it contributes to a positive return on investment (ROI). If not, get rid of it and save that cash.
Similarly, checking outstanding invoices and bank reconciliations can help you to spot cases of inaccurate figures as well as fraud and embezzlement. Such issues typically eat into the amount that a business would otherwise have saved for constructive projects.
Source for more financing
Every once in a while, you may need additional financing to sustain a healthy cash flow. We've already discussed debt financing in point #2 above, but it's not your only option.
You can also inject cash into the business through equity funding. Unlike debt financing, which requires repayment even if your business fails, equity funding doesn't. Of course, the tradeoff is that you may need to give up some control of the company to the person who is investing, and that highlights why it's critical to choose competent and congruent partners should you decide to go for equity funding.
Invest in growth
Business finances are not just for running the company; they're also meant to grow it. So after putting in place measures for saving and acquiring additional capital, you can set aside some money for exploring growth opportunities.
Growth comes when you invest in innovative technologies, diversify and attract highly qualified employees. All these things require financing. So it's better to have a reserve of cash ready for when the opportunity comes than to have the opportunity but lack the cash.
If you're still unsure how to properly manage your small business finances, then don't hesitate to bring in a professional. Trained accountants will help you set up a system that works best for your company.
You can also start saving now by taking advantage of Hatch perks. These cost-saving rewards are designed for small businesses. All you need to start is a Hatch business checking account.