One of the biggest lessons I learnt early on trying to make my living from my own small business was the importance of cash flow. When I got it right daily life was much smoother and easier. When I got it wrong I had sleepless nights and loads of anxiety.
Cash flow is simply the money coming in and the money going out of the business. Sales and expenses.
As simple as that idea is the reality of learning how to manage it can be really painful.
When you’re starting out you can’t tell what your sales are going to be. You can take a fairly good educated guest what your costs are given you already know what it takes for you to live and you can get quotes about fees, fines, prices and rents.
Estimating sales tends to be an act of faith, a guessing game until you get at least your toe in the water and start testing your ideas, your products and services. That’s why market testing is so important. The more research you do the more you test the market and find out what is actually wanted and what will actually sell the better your chances of success are.
So when you’re starting out you need to make sure you have enough money on hand to meet your outgoings until your incomings can exceed them. Having the working capital on hand to finance your business and keep the cash flowing makes all the difference.
Once you're up and going the issues of always having enough working capital - the money to invest in the business from savings and cover unexpected costs - and having a healthy cash flow are your main financial goals.
I’ve found that planning out my money for the coming months and the year ahead makes the biggest difference with successfully having a healthy cash flow.
Knowing what regular expenditures need to be covered is the basic level. These are the weekly, fortnightly, monthly, annual and bi-annual expenses. They can include rents, insurances, leases, trade shows, subscriptions (these can easily add up to a lot of money every month so be careful), wages, utilities, components, technology, vehicles and equipment.
Just as there are multiple channels for money to leave your bank account there can be multiple channels for money to come in and increase the inflow of funds.
If you’re relying on just one income stream then you're choosing a high risk for your business. What happens if that sole source is harmed in some way? The contract disappears, the selling environment changes?
Just look at how others are successfully increasing the number of ways for money to come into their businesses. Take for example bloggers, they earn money from advertising, consulting, books, specialist services, speaking gigs and affiliate programs.
If you're an artisan earning your money from what you sell then your channels might include your website, a pop up stall or regular markets and fairs, social media platforms, an online artisan selling platform like easy.
If you're a communications specialist you might have two main clients and six small but regular clients along with advertising via your newsletter and online platforms.
The key is having multiple ways for money to come to you. Why leave money on the table when you can monetise assets like your knowledge as well as your products and services?
Beware of Traps
One of the most naive comments I hear from non business owners about money is that such and such a cost is a tax write off and you get it all back at tax time. Frankly, if any business owner is paying so much tax that they get a great big tax refund each year then they need a new account and their head read.
Yes, I can buy things for the business and they go down as expenses and I don't pay tax on that but what really matters is the impact on my cash flow. That far out weighs any other issue.
If I stuff up my cash flow then there are all sorts of problems, I eat into my working capital unnecessarily, I mess around my savings and I have hoops to jump. And when you’re starting out or going through a global financial crisis that can actually mean loosing your business and having to try and find a job in a very tight and competitive market place.
So the key is to prioritise your cash flow rather than feel all naively chuffed about creating another tax write off.
Power of Money
Knowing when you need to pay what and how much is half the cash flow management process. To do this you need to plan.
One of the best things about this planning is it gets you thinking about the business and the year ahead - what do you want to achieve, how are you going to do that, what’s the five key stars of your marketing plan, do you want to be spending big dollars on advertising, what worked last year and brought in the money and what didn’t mean hopes and expectations, what were the five main ways money left the business, did every monthly subscription pay for itself, what do you need to skill up on?
By understanding where the money is within the business you can then start on the process of making the business more profitable by decreasing costs and increasing income. Ask yourself where is it possible to reduce expenses by five per cent and increasing sales by five per cent? But you can only possible when you know what’s happening with the financial administration of your enterprise.
This sort of exercise is where the money is, by putting on your business hat, questioning and thinking like an entrepreneur you get to take a step out of the daily hurly burly and work on the business, to actually grow the business. The thinking, analysing, planning and questioning is truly powerful.
If you have a negative mind set about money administration, business planning and budgeting then none of this will sound good to you. By changing these costly thoughts and feelings around to something positive you’ll have a more successful business that you’ll enjoy more. Why did you get into business in the first place? Was part of the reason to enjoy life more?
Knowing where your money is can be one of the most powerful experiences for a business owner. It is liberating, even if you're skint for a month or two during your slow season. At least you know how to manage your expenses and have had a chance to squirrel away money for them.
7 Cash Flow Tips
- cash flow is crucial for the successful daily running of your business so understanding how it works through out the year for your individual enterprise is really powerful.
- make a list of all your expenses and when they occur, from the weekly and monthly to the annual and everything in between.
- be sure to have multiple income channels so money can regularly stream into the business, even during the slow season.
- think in terms of how a business cost will impact your cash flow rather than how good it is to have a tax write off.
- squirrel money away for the slow times of the year because often that’s when the unexpected cost will appear - the delivery van dies and needs fixing or replacing, the app development cost just doubled, the computer died.
- take time to plan the business for the year ahead, look to where there can be growth and how that will be funded, analyse what did and didn’t work in the previous year so you can increase the flow of money coming in and decrease the amount of money going out.
- understand what’s happening with your money and you can find ways to make profitable five per cent changes.