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Avoid Becoming a Small Business Cash Flow Casualty

Cash flow is one of the most important figures to any business, large or small. In short, cash flow is the net amount of cash (and equivalents) taken in and distributed out.

Positive cash flow means you’re bringing in more cash than you’re burning – and that’s cash you can use toward growing the business. Negative cash flow is the opposite, of course, and it’s one of the top reasons why many companies don’t make it past their first year.

How can you keep your company cash flow-positive? Obviously, you have to have a good core – you must have a product or service that people want or need, and you must be able to market it. But even then, small business owners still need to properly manage the books, which means not falling into one of several bad habits and practices.

Here are three things to do to improve your small business cash flow.

1. Don’t Go Overboard With Overhead: Overhead is any expenditure that isn’t immediately related to making or selling a product or service – essentially, anything outside of materials and labor. So, for instance, rent or high-speed internet services could be considered overhead – and they’re essential. There are numerous overhead expenses that are simply part of running a business, and the best you can do is negotiate slightly better rates on those, possibly by finding a new location or a new service provider.

But there are other types of overhead that might seem attractive and exciting, while actually providing very little help to the top line while crushing your bottom line. Think about a pinball machine for the office – you can claim “morale booster,” but a couple thousand dollars is no small sum to a small business and would be much better spent on marketing or other means of growing sales. That’s a very clear example, but you need to look at other expenses that might seem easier to justify but still aren’t materially benefitting the company, such as too many business lunches on the corporate dime.

2. Forecast, Don’t Wish: If you project annual sales of $1 million, and plan on spending $900,000, that $100,000 windfall will look great on paper. But if your revenue projection had absolutely no grounding in reality, and you finish the year with $500,000 in sales against that same $900,000 spent, you’ll be in a world of hurt.

Yes, forecasting can be difficult, especially for newer businesses that don’t have much history to go on. But they must be carried out with a conservative eye, and using all the data you can possibly scrounge up. Where you can, look for outside help, whether it’s sales data from other businesses within the same industry, or consulting with experts in your space. The more accurately you can project your intake, the more likely you are to avoid a nasty surprise splash of red ink when the year ends.

3. Stick to, Monitor Your Budget: If you haven’t yet created a budget, here are a few tips on how to get started. But no budget is worthwhile if you don’t keep tabs on it throughout the year and correct for new data as it comes up.

This can become particularly important around busy seasons, such as the holidays for retailers and some manufacturers. Keeping an updated cash flow statement can help you better know what’s coming in and what’s going out, which is essential when it comes time to actually pay the bills. This will also help enforce other good cash flow habits, such as making sure that clients honor invoice deadlines.

If you’re not sure how to put together a cash flow statement, or simply have more questions about how to keep the cash coming in, look to the accounting experts at McManamon & Co. We offer consulting services to small and midsize businesses, including proactive year-end cash flow planning, that will help you accurately map out the year and maximize the cash you bring in.

Simply guessing at your cash flow is the business equivalent of Russian roulette. Don’t gamble with your company’s life. Call us at 440.892.9088 or contact us online to ensure that your business’ lifeblood keeps flowing.


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