Cashflow 101
5 Simple Strategies to Keep Your Small Business Afloat
Cash flow. It's the lifeblood of every business. You can be profitable on paper, but if you don't have enough cash moving through your company to pay the bills, you're in big trouble. Keeping your business afloat isn't about having a massive bank account; it's about managing the flow of money in and out. Here are five simple strategies you can implement right away to help your business stay healthy and prepared.
1. Speed Up Your "Money In" 💸
The money your customers owe you is called Accounts Receivable. The faster you collect it, the better your cash flow. You're not being rude; you're just running a business!
Invoice Immediately: Send the invoice as soon as the work is done or the product is delivered.
Offer Early Payment Discounts: Give a small discount (like 2%) for payments received within 10 days. This encourages quick action.
Follow Up: Don't be shy about following up on late payments. A simple, polite email or phone call can make all the difference.
2. Slow Down Your "Money Out" 🐢
The money you owe to suppliers is called Accounts Payable. While it's important to pay your bills, there's no harm in being strategic about it.
Negotiate Longer Terms: When you work with a new vendor, ask for 45 or 60-day payment terms instead of the standard 30.
Pay at the Last Minute: Schedule your payments for their due date, not the day you receive the invoice. This keeps cash in your account for longer, giving you more flexibility.
3. Don't Let Inventory Drain You 🛍️
For product-based businesses, unsold inventory is just cash sitting on a shelf. It ties up your money and often loses value over time.
Embrace "Just-in-Time": Order inventory only as you need it, or when a customer places an order.
Get Rid of Old Stock: If a product isn't selling, offer a discount or a special promotion to move it out. It's better to get some cash for it now than to let it sit there collecting dust.
4. Create a Simple $Cash$ Flow Forecast 🔮
You wouldn't drive a car without checking the gas tank, so why run a business without knowing if you're about to run on empty? A cash flow forecast is a simple spreadsheet that tracks your expected income and expenses for the coming weeks or months.
Look at Your Calendar: Note your upcoming sales, recurring revenue, and upcoming expenses like rent, payroll, and large supplier invoices.
Identify Highs and Lows: This helps you see if you're heading for a cash crunch so you can take action before it's too late.
5. Build a $Cash$ Cushion 💰
Just like a good emergency fund for your personal life, your business needs one too. Set a goal to have at least three months of operating expenses in a separate, easily accessible savings account.
Start Small: Dedicate a small percentage of your profits—even just 1%—to this account every month.
Use It for Emergencies: This cushion is your safety net for unexpected repairs, a major client leaving, or a slow sales month. It provides peace of mind and keeps you from having to take on high-interest debt.
Be the CEO, Not the CFO
As a business owner, it's easy to fall into the "I'll just do it myself to save money" trap. You're a pro at what you do, so surely you can handle the finances, right? But here's a secret that many successful business owners learn early on: trying to be a one-person accounting department is often a costly mistake. You’re a visionary, a salesperson, an operations guru—not necessarily a tax strategist or a bookkeeping expert. And that’s okay! Knowing when to bring in a pro isn’t a sign of weakness; it’s a sign of a smart, growing business.
✯✯All-Star Financial Team✯✯
The who's who in the world of financial professionals.
The Bookkeeper: This is your day-to-day workhorse. They handle the nitty-gritty of recording transactions, reconciling your accounts, and keeping everything organized. Think of them as the historian for your business, meticulously documenting every financial event. They keep your books clean and ready for analysis.
The Accountant: An accountant is your financial analyst. They take the clean data from the bookkeeper and evaluate your financial statements (like your P&L and Balance Sheet). They help you understand what the numbers mean, prepare for tax season, and can offer valuable insights into your company’s performance.
The CPA: A CPA (Certified Public Accountant) is the expert-level advisor. They're licensed professionals who can offer strategic tax planning, legally represent you in front of the IRS, and provide high-level financial consulting. They can help you make complex decisions about things like business structure or long-term growth strategies.
Why Hiring a Pro Is a Money-Saving Move (Serious!)
It seems counterintuitive, but paying for professional advice can actually save you a lot of money in the long run.
You'll Find More Deductions: An experienced professional knows the tax code inside and out. They'll find every legal deduction and credit you’re entitled to, which can significantly lower your tax bill.
You'll Avoid Costly Mistakes: From missing deadlines to making a bookkeeping error, financial mistakes can lead to penalties and wasted time. A professional helps you avoid these pitfalls.
Your Time Is Your Most Valuable Asset: How much is your time worth? A pro can handle your books in a fraction of the time it would take you. This frees you up to focus on what you do best: growing your business, serving your clients, and building your brand.
You'll Gain Strategic Insight: A good accountant or CPA doesn't just manage your numbers; they help you understand them. They can point out trends in your sales, identify areas where you're overspending, and help you set profitable pricing strategies.
In the end, hiring a professional isn't just about handing off a chore. It's about bringing an expert onto your team to help you make smarter decisions, reduce stress, and build a more profitable and resilient business. It’s the difference between doing your books and truly understanding your business.
Don’t Drive Blind
Your Business’s GPS: Budgeting and Forecasting
Imagine getting in your car for a long road trip without a map or a destination. You'd probably run out of gas, miss all the best stops, and end up completely lost. That’s exactly what it feels like to run a business without a budget or a financial forecast.
Many business owners just focus on the day-to-day—making sales and paying bills—without a plan for where the money is going or where the business is headed. But here’s the thing: a little bit of planning goes a long way.
What’s the Difference?
You might hear these two terms used interchangeably, but they serve different purposes. Think of them this way:
A Budget is your financial plan. It's a detailed breakdown of your expected income and expenses for a specific period (like a quarter or a year). It's based on what you want to happen, giving you a roadmap to follow and helping you control your spending.
A Forecast is your educated guess. It’s a projection of your future financial results based on what you think will happen. It uses historical data, market trends, and your own assumptions to predict future revenue and expenses. A good forecast helps you anticipate cash flow shortages and see potential growth on the horizon.
The Cost of Skipping the Plan
So what happens when you’re just winging it?
Sudden Cash Crises: You might be profitable on paper, but if you don't know when a big expense (like insurance premiums or quarterly tax payments) is coming, you could be caught short on cash. No one likes that sinking feeling of not being able to make payroll.
Missed Opportunities: A clear budget and forecast can reveal where you have extra money to invest in a new marketing campaign, upgrade your equipment, or hire that amazing new employee. Without a plan, those opportunities might pass you by because you don't realize you can afford them.
Bad Decisions: When you don't have a plan, your decisions are often reactive and based on emotion instead of data. You might overspend impulsively or cut back on a key expense that's actually helping your business grow.
Lenders Won't Take You Seriously: If you ever need a loan to expand your business, the bank will want to see a detailed business plan. A solid budget and forecast show that you understand your business's finances and have a clear vision for the future. Without them, you're a much riskier bet.
Getting Started Doesn't Have to Be Hard
You don't need a fancy finance degree to get started. Just a simple spreadsheet or a beginner-friendly accounting tool will do.
Start with the Past: Look at your financials from the last year. What were your biggest expenses? What were your best months for sales? This gives you a baseline.
Make a Plan for the Future: Use that past data to create a simple budget for the next three months. Project your income and list your fixed expenses (rent, subscriptions) and your variable expenses (supplies, marketing).
Adjust as You Go: Don't just set it and forget it. Check your budget against your actual results every single month. See where you're on track and where you need to make changes. This is where your forecast comes in handy—it's a living document that you adjust as the business changes.
Budgeting and forecasting aren't about being restrictive; they're about giving you clarity and control. They turn a chaotic ride into a purposeful journey, helping you navigate challenges and steer your business toward a successful future.
The Art of the “Double Check”
The Art of the "Double Check": Why Reconciling Your Accounts Is Non-Negotiable
You've heard the advice a million times: "Stay on top of your books!" But what does that really mean? For many business owners, it's just about entering income and expenses. Easy, right? Well, there's a crucial step that often gets missed, and it's one of the simplest habits you can adopt to save yourself a ton of headaches: reconciling your accounts. Think of it like checking your grocery list against your receipt after a shopping trip. Did you get everything you paid for? Did you pay for anything you didn't get? Reconciliation is the financial equivalent of that careful double-check. What Exactly Is Reconciliation? In a nutshell, reconciliation is the process of comparing your internal financial records (the transactions you've logged in your accounting software, spreadsheet, etc.) with the official statement from your bank or credit card company. The goal? To make sure that every single transaction on your statement matches up perfectly with a transaction in your books. No more, no less.
The Big "Why"! 3 Reasons You Shouldn’t Skip This Step
So, why bother with this seemingly tedious task every month?
You'll Catch Mistakes and Errors. Let's face it, we're human. You might have accidentally entered $150 instead of $15. Or maybe a vendor charged you twice by mistake. Reconciliation is your safety net. It's the moment you'll spot those typos, duplicate charges, and transactions you forgot to log. Without it, those little errors build up and completely throw off your financial picture.
You'll Be the First to Spot Fraud. Unfortunately, fraudulent charges are a real risk. By going line by line through your bank statement, you'll immediately notice any unauthorized charges. Catching a small, fraudulent charge early can prevent a much larger one down the road. It's an easy way to stay on top of your financial security.
Your Financial Reports Will Actually Be Right. This is the big one. Your Income Statement and Balance Sheet are only as good as the data you put into them. If your books are full of errors and omissions because you never double-checked them against your bank, then you can't trust the numbers. This leads to making poor decisions based on flawed information—like thinking you have more money than you do, or underestimating your true expenses.
What Happens When You Don’t Reconcile? Neglecting this simple habit can lead to some serious drama:
Financial Surprises: You might get an overdraft fee because your bank balance was lower than you thought.
Audit Anxiety: Nothing says "red flag" to an auditor like messy, unreconciled books. They'll want to see that your internal records match your official statements.
A Massive Headache: Trying to reconcile a whole year's worth of transactions at once is a nightmare. Doing it monthly takes 15-30 minutes; doing it all at once can take days.
Not Just Your Bank and Credit Cards
While those two are the most common accounts, good reconciliation practices extend to almost every account on your Balance Sheet. To get a truly accurate picture of your business's health, you should also be regularly reconciling:
Loan and Line of Credit Accounts: Are the payments you've recorded matching the loan statement? You need to make sure the principal and interest are being applied correctly and that your outstanding balance is accurate.
Accounts Receivable (A/R): This is the money owed to you by customers. You should reconcile your A/R records to make sure every invoice you've sent out has either been paid or is still outstanding. This helps you follow up on overdue payments and prevents income from falling through the cracks.
Accounts Payable (A/P): On the flip side, this is the money you owe to your suppliers and vendors. Reconciling your A/P ensures you're not paying bills twice and that your records match what your vendors are saying you owe.
Inventory Accounts: If your business sells products, you need to regularly reconcile your inventory records with a physical count of your stock. This helps you identify shrinkage (theft or damage), track what's selling, and ensure the value of your inventory on your Balance Sheet is correct.
Payroll Liabilities: When you run payroll, you withhold taxes and other deductions from your employees' paychecks. You should reconcile these liability accounts to make sure the money you've set aside for the government and other agencies matches what you actually owe them.
By adding these accounts to your reconciliation routine, you'll be building a rock-solid foundation for your business's financial records. It’s the difference between having a good grasp of your finances and having total confidence in them.
A Simple Guide to Reconciling (It's Easy!)
Pick a Date: Choose a specific period, like the last day of the month.
Gather Your Tools: Grab your bank or credit card statement and reports, then open up your bookkeeping software (or spreadsheet).
Go Line by Line: Compare every single transaction on your statement to your records. Check them off as you go.
Investigate Discrepancies: If you find a transaction in your books that isn't on the statement, or vice versa, find out why. It could be a timing issue (a check that hasn't cleared yet) or an error.
Achieve Balance: Once everything matches and your internal ending balance is the same as your statement's ending balance, you're done!
Reconciliation is a small, monthly habit that pays huge dividends. It gives you confidence in your numbers and keeps you one step ahead of potential problems.
A deeper insight into your business, consistently
Beyond just mixing up money, a huge mistake many business owners make is not truly understanding their key financial reports. They might know how much cash is in the bank, but they don't understand the full story these documents tell. Think of it this way: checking your bank balance is like knowing the score of a basketball game at a single moment, but the financial statements are the full play-by-play, box score, and analysis that explain how the game was won or lost.
There are three essential financial statements you need to understand:
The Income Statement (or Profit & Loss Statement): This is your company's report card. It shows how much money your business made (revenue), how much it spent (expenses), and what was left over (profit or loss) over a specific period, like monthly, quarterly or yearly. It's the document that answers the question, "Is my business actually profitable?" A common pitfall is confusing a positive cash flow with a profitable business. You can have plenty of cash from a loan or selling an asset, but still be losing money on your day-to-day operations. The Income Statement reveals the truth about your earning power.
The Balance Sheet: This is a snapshot of your company's financial health at a single point in time, like a photograph. It shows what your business owns (Assets), what it owes (Liabilities), and the net worth of the company to its owners (Owner's Equity). The core of the Balance Sheet is the simple equation: Assets = Liabilities + Owner's Equity. Understanding this document helps you see if your business is financially stable. For example, are you carrying too much debt? Do you have enough assets to cover your short-term obligations? It's crucial for assessing long-term solvency.
The Statement of Cash Flows: This is the video of all the money moving in and out of your business over a period. It's different from the Income Statement because it focuses strictly on cash. A business can be profitable on paper (according to the Income Statement) but still go bankrupt if it runs out of cash. This statement breaks down where cash is coming from and going to, categorizing it into three areas: operating activities (from your core business), investing activities (buying or selling assets), and financing activities (loans or owner investments). This is the document that helps you answer the crucial question, "Why is there no money in the bank even though we made a profit?"
The Consequences of Ignorance
When you don't understand these statements, you're essentially flying blind. You might:
Make poor strategic decisions: You could be raising prices on your most profitable product because you don't realize it's a cash cow, or you might be pouring money into a marketing channel that isn't generating a return.
Misjudge your business's health: You might think you're doing great just because your bank account is growing, but the Balance Sheet could reveal you're taking on dangerous levels of debt to fuel that growth.
Struggle to secure funding: Lenders and investors won't just look at your bank account; they will demand these three statements to assess risk and potential return. If you can't provide them or explain them, you'll likely be denied.
Ultimately, learning the basics of these three financial statements empowers you to be a more effective leader, allowing you to make proactive, data-driven decisions instead of reactive ones based on a simple bank balance.