3 ways to prevent problems for small businesses
Opening a small business is a risky endeavor. You’ve likely heard the numbers, and you know that many small businesses fail. What most people don’t realize, is that there are a myriad of reasons why this occurs. It isn’t even necessarily that the idea, the location, or the timing is bad. Sure these are common hurdles, but even profitable and sound businesses can fall short. One of the prime reasons for this is problems with cash flow.
Cash, as they say, is king. It is a necessary part of existing in the world, and it is an integral part of any business. Ensuring your cash flow doesn’t run into a blockade is one way to ensure your business is healthy and successful for years to come. Thankfully, there are a few simple ways to avoid a cash flow crisis.
Keep Good Books
Bookkeeping is the cornerstone of any good business, whether it is freshly established or a company that has been in business for years. We’ve seen how careless bookkeeping can bring down a business. You just need to look at the news to see how accounting blunders have led to big losses. With that being said, keeping on top of your books and ensuring they are organized is one of the most proactive ways to avoid cash flow problems in the future.
Experts see this issue with new businesses often. Often, new businesses are so busy working on setting up shop, they forget to start off with good books, which can only lead to disaster down the road. Service-based industries that rely on invoicing can often fall victim to this problem. Sloppy bookkeeping and inconsistent invoicing can lead to money being lost in the shuffle, which can create a cash flow problem for a small business or a large corporation.
To avoid this pitfall, it is imperative to keep a good accounting practice in place at all times. Using software and keeping it up to date, or outsourcing the task can keep everything moving smoothly.
Forecast Your Potential Issues
Cash flow means exactly what it sounds like, the cycle of cash coming in and leaving your business. While many businesses fail because they don’t have enough income to sustain themselves, there is a subset of businesses who fail because they haven’t properly forecasted incoming and outgoing money. There are businesses that, on paper, are profitable but they don’t have the cash to sustain themselves.
How does this happen? Simply put, the business has failed to reconcile their fixed expenses with their income cycle. To avoid this, you should create a forecasting document that lists your income, and expected income based on sales cycles, previous income and expected invoicing, and sales. The document must also include your fixed expenses and prospective expenses.
This forecasting helps to ensure there is enough money available for your operational expenses, and that your cash is all accounted for, including your net profits. This allows you to have the big picture, which then allows you to plan for your business accordingly.
Create a Reserve
Every home should have an emergency fund and a savings fund. This is true for a small business, too. Many businesses encounter cash flow problems when they forget to create a cash reserve and find they have no way to expand or deal with unexpected expenses.
According to experts, a reserve of three to six months of expenses is a good place to start. You can build out your reserve from there. Credit is also a necessary part of doing business and creating a cash reserve. Lines of credit can be used when opportunities arise that require prompt payment, or emergencies crop up. Both a cash reserve and a line of credit can keep a business floating along smoothly, and help to ensure you don’t have any significant cash flow problems that could potentially sink an otherwise profitable business.
Armed with this knowledge and proper implementation of a few sound business practices, you can rest assured that cash flow is unlikely to cause your small business to face adversity. Proper documentation, an adequate cash reserve, and a good forecasting strategy can keep your business healthy and thriving.
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