Cash is king! The one driving force that keeps your business afloat, and when I say, it is important to understand cash flow management and financial management I certainly don’t say it so lightly.
As a Business Owner, you got two choices in front you of, one you rule the cash like a king or you become a slave within your own business. The lack of cash flow management and poor financial management is one of the most significant reasons that small businesses fail!
I assure you that this is not something that we are making up. In fact, many studies and research proves the importance of managing cash flow and financial management.
Here is what 3 different research pieces have to say:
- A University of South Australia study identifies lack of financial management as one of the top 3 reasons why small businesses fail.
- A University of Technology Sydney study found that it was the route cause of most small business failures
The Bank of Queensland lists lack of funding as the third most common reason for business failure and financial mismanagement as the fourth most common reason.
By looking at what these individual researchers have to say, it is clear that the most common factor for either big, medium or small businesses is the lack of knowledge in financial management.
The symptoms- Identifying how your business is going towards failure!
So how do you know if you are at risk of business failure due to cash flow management?
It’s simple really if you struggle to pay an invoice, tax bill or payroll because you have insufficient cash in your business bank account then it is obvious that your business is at financial risk of failure.
But other more subtle signs can help you identify whether you are leading to business failure due to cash management. Ask yourself this question- Are you paying yourself an above-market salary?
If you are not then your business is identified to be at financial risk of failure – you are simply stalling the inevitable by working for a below-market salary or for free. If that is the case then you are a slave!
The cure- How you can overcome the risk of financial failure.
The risk of potential financial failure is chaotic for a business. In addition to that, the lack of knowledge on how to overcome this crisis is even more disorderly to work with. As a Business Coach, I understand that this could be harder if you do not have a clue about it. This is why I am here to give you my top tips to help you eliminate the risk of business financial failure. There are quite a lot of options for you to choose from, but first, let me go through the top 5 tips!
- Create a Budget
If you don’t know your business costs and what type of sales you need to make to cover these costs then you are driving blind. Like traveling in a new city without a map, your chance of getting to your destination of financial freedom is highly unlikely.
However, having a map is useless unless you know where you are. What I mean to say is that simply creating a budget every month is not going to be enough. A budget is the same unless you compare your monthly budgets to see how your business is progressing. By doing so, you can improvise, amend and improve your budget strategy to avoid the business being at the risk of financial failure.
- Know what you are looking at
When you run a profit and loss statement do you know if it is a cash report or an accrual report? Don’t know what the difference is? Let me tell you! A cash report means money that comes in and money that goes out, while on the other hand, accrual accounting is when you send your invoice and when you enter a purchase order – they are completely different. You can be making accrual profit and be cash poor.
- Pay yourself first
Let’s compare a scenario, when you are on a plane you are told to fit your oxygen mask first before helping other people fit their masks. But why do we do it differently with our businesses? We tend to pay ourselves with what is left, after deducting all employee costs and other expenses. This should not be the case, let me tell you how it can be done.
Mike Michalowicz in his book “Profit First” provides a strategy of setting up different bank accounts for different needs like profit, tax, wages and operational expenses.
He then addresses paying a proportion of every dollar received into these accounts in the order I listed them. If your materials or contractors represent a significant proportion of your costs then create an account for them too. This will help you to always have money to pay the people you owe money, yourself, your team and the taxman. As a result, you will be forced to run your business on what is left – and trust me you can do that.
I have done this in my Fire Protection Maintenance business and it 10X my profit, doubled my salary and made no impact on how my business operated.
- Get paid quickly
How do you get paid?
Do you send an invoice and wait to get paid? Does this take 30, 60 or 90 days?
How quickly do you ask to get paid? Does it take weeks to send out an invoice or is it done immediately? The lack of strategy to implement quick payments can lead to delays in your business and cause a lack of cash flow management.
Did you ever consider that if people owe you $50,000 now (your debtors) and to double the money in your business and increase it to $100,000, you will need an additional $50,000 to invest in growing your business. Do you have that $50,000 capital to invest?
However, it is not the same with all businesses, other businesses do it differently. Let me tell you how they do it: I had my water filter replaced at home by a large South Australian filter company. The technician arrives at the location, replaces the required things and hands me a bill for payment. I immediately paid him then and there to complete the transaction.
This way, I made an effective payment for the company, which will result in them having the cash before they even paid their team to do the work. In this case, the company needs no money to grow their business.
As a Business Owner or Field Field Technician, you can too do that. Think differently on how you can provide the customers with an invoice as soon as you are done with the job. This way you are being paid immediately rather than waiting for many days.
Platforms like i4T Business allow you to invoice while you are in the field and then take payment immediately.
- Get help
If you are unsure about whether your business is leading to the financial risk of failure or simply unsure about what all your financial reports mean then get help!
Most business owners don’t start a business because they are good at financial management, they start because they are good at providing the service that their business provides. So that doesn’t mean they must fall back and accept the lack of financial management and cash management in their business.
When you start a business financial literacy does not naturally come to you. If truth to be told, training in financial literacy is not provided through the business itself, you need to go out and gain the knowledge if you should continue working in the business, just like you did when you got trained to do your job.
So talk to your accountant or a business coach to get help to understand your numbers. In my experience business coaches are better because most accountants are too technical, they can’t explain the concepts simple enough – a problem of most experts. For a business owner with less or no financial knowledge that could be too much to handle.
With the lack of time and lack of resources to pursue knowledge about financial management and cash flows, it can be frustrating as an owner to see your business taking the road to financial failures. The Top 5 tips that I have provided to help you avoid being a slave to money will you if you are willing to take the step forward!
To Conclude: If you think this has helped you then automate your financial process with i4TBusiness and create a simplified experience to manage your finances transparently.