Three Easy Small Business Cash Management Principles That Make A BIG Difference
Dear friends, The Balancing Act Podcast is BACK for a second season and better than ever. Click HERE to listen, or continue reading below for a detailed recap of what was discussed in the first episode of season 2--either way, you need to know this stuff.
Practical wisdom for small business cash management
Now, with more than a year under my belt of operating independently as a virtual CFO serving female small business owners, and after a robust career as a corporate accountant, trust me when I say I’ve seen some things. I’ve gained some practical wisdom over the years, and it’s my delight to share it with you.
First up from that vat of practical wisdom--small business cash management explained, and some key tips regarding how to do it well.
Why is small business cash management important?
Statistically, but also according to my own observation, cash management is the make-or-break factor for determining whether a small business will sustain its success. When cash is managed properly, small business owners find themselves free from worry about tax liability and operational expenses, as well as able to make strategic investments toward the healthy growth of their businesses. However, when cash is managed poorly, 80% of small businesses fail within their first year. Yikes, right? Yeah.
How to properly manage cash for small business success
But you can prevent catastrophic small business failure by implementing three easy steps into your small business management routine. They are as follows:
Reserve cash for a rainy day.
The small business cash management pattern I most typically see is one where, for at least several months, the small business incurs a loss as its owner makes initial investments in order just to get started and, along the way, refines and reorganizes offers, marketing strategies, and fulfillment tactics to suit the needs and desires of their ideal customer or client. To incur a loss during that period of early small business establishment is normal.
But then, all of that investment, refinement, and reorganization pays off. Which is amazing! The small business owner hits their target--they sell products or they land clients. The business starts to generate a profit, and perhaps even more quickly than the owner anticipated.
And, at that point, they start to think: “Having XYZ would really help me keep up this pace.” “Maybe I should hire help if I’m going to be operating at this level.” “Perhaps I should grow my inventory.” Etc. And perhaps they should. But, I’ll argue, all in due time.
If this scenario reminds you at all of your own, your first priority should be to save for a rainy day. It’s just the nature of doing business--cash flow will fluctuate. Every month may not be as good as this one. So you don’t want to over-leverage your resources when cash flow is up only to find yourself backed into a corner during a slower month. That’s how new small businesses grow too fast and ultimately fail.
To prevent that from happening, I recommend keeping on reserve at least three months-worth of operational expenses.
And don’t worry--you don’t have to do it all at once.
My recommendation: Use your bookkeeping system to review and add up all of your operational expenses, which may include rent, insurance, subscriptions, payroll, etc., and settle on the total cost of running your business month-to-month. Multiply that per-month sum by 3, and make the resulting figure your goal for rainy day savings. Then, open a business savings account and, each month, set aside a percentage of your revenue until you reach your goal. And then, when you need it, use it and replenish it without worry--ahh, one less thing to panic about.
2. Prepare for tax liability.
I wish it weren’t so, but it just is: An increase in profit almost always leads to an increase in tax liability. And to avoid getting slapped with a giant surprise bill at the end of the year, you need to be prepared.
My recommendation: Use your bookkeeping system to produce an up-to-date Profit and Loss Statement at the end of each month. Your Profit and Loss Statement will show you exactly how much revenue your small business generated (money it made) within a certain time period, as well as the level of expense it incurred (money it spent), leaving you with your net profit (revenue - expenses), on which you’ll be taxed. Take 25% of that net profit and set it aside in your business savings account in preparation for tax time.
Now, note that 25% isn’t an exact figure--it’s my best estimate. If you’d like to work within a more precise range, I recommend engaging a tax expert with experience serving businesses within your particular industry. They’ll be able to more closely examine your small business financial history, current operations, and overall personal household situation to get you closer to an exact figure.
3. Reserve funds for future strategic business investments.
Saving isn’t just for the boring stuff; it’s also about achieving your dreams. It’s how you increase your inventory, hire help, update your tools, learn new strategies, and ultimately achieve healthy small business growth without dangerously over-leveraging your resources.
My recommendation: From the Profit and Loss Statement generated each month by your bookkeeping system, determine 3-5% (whatever makes you feel most comfortable) of your net profit. Set the resulting figure aside in your business savings account, and add to it every subsequent month.
That way you’re ready when opportunities arise. Granted, your investment savings may feel small when you first get started, but every baby step moves you closer to your goal!
Join the Profit to Prosperity Membership
One such opportunity that’s calling your name is the Balanced By Stevie Profit to Prosperity Membership, where, between direct access to small business CFO expertise, thorough financial educational curriculum, and visits by guest experts covering a plethora of small business management topics, for a price far less than that of traditional business coaching, you can basically get solid business coaching.
Click HERE and HERE to read more specifically about what to expect from the Profit to Prosperity Membership.
And always feel welcome to reach out with questions!
