We have cash flow problems. Don’t ever seem to have enough cash reserves to get through life’s big and little bumps. Know we need to figure that out better. I don’t want to keep putting my personal funds in whenever there’s a cash crunch.
Thoughts of the Day: Having enough cash on hand is part of building a successful, stable, productive business. Make sure there are enough sales and profits to run the business the way you want. Make a plan to build up cash on hand every week. Balance year-end tax planning with keeping cash in the business at year-end. Use a budget and capital planning to spread out big periodic expenditures.
Managing cash flow and cash reserves is part of every business owner’s responsibility.
Great that you’re asking for suggestions on how best to do that. Let’s get to work.
When cash on hand consistently falls short, there are a few key places to look. The first question to ask is: are sales and profits on the company’s customers sufficient to provide the net income needed to cover loan payments, pay taxes on profits, and put extra cash away.
Some companies will make the mistake of slashing marketing and sales expenditures when cash gets tight. Don’t recommend doing that, since sales and marketing are key to boosting sales and profits which will produce more excess cash. Instead, suggest looking into how well effective sales and marketing efforts are producing, and switching efforts around until you’re confident you’re getting a good payoff.
To fix things long term, figure out how much cash on hand will keep things safe. We recommend 3 – 6 months of overhead expenses.
Decide on an amount to put away in cash reserves each week in order to make steady progress at achieving that goal. Figure that it could take you a year or more to reach your goal. Consider putting your reserve cash into a separate “don’t touch” money market fund, or even in another bank in order to make it harder to access when things get tight financially.
Many times companies have plenty of cash during the year, but use it up at year-end buying things in order to save on taxes. Be careful. For every dollar of tax savings, you have to spend 3 dollars on equipment and services. It is probably better to pay the taxes, and put the remaining 2 dollars into savings.
Plan things out with a budget that takes into account both regular monthly expenses and the quarterly, annual, and one-time payments you’ll need to make.
Watch out for expenses that only occur periodically. Remember to budget for insurance plans and other programs that require a significant percent upfront before switching over to regular monthly bills.
When building the budget, ask if you’re overspending on overhead expenses.
Take a close look at general expenditures related to office space and infrastructure, overhead payroll for managing functions, and handling support services. Check if you’re overcommitted on the loans you’re carrying.
Finally, take a look at the amount of money that gets taken out of the business at year-end. Build a plan to pay taxes out of a savings account. Budget the amount of money you want to take out. Once you’ve got that planned out, and only then, start to think about additional expenses you might approve for the coming year.
The most important thing to remember when building a business is that cash on hand is a signal that the company is profitable. Profitable companies have the greatest value when they show a profit.
