What's The Most Important Thing to Track in Your Small Business?
There are a lot of terms that are tossed around in the accounting industry. You hear profit/loss, you hear balance sheet, and the third little report that a lot of bookkeepers and even accountants don't use on a regular (but you should!) is your cash flow statement. That is the MOST important thing to keep track of in a small business! So, I want to tell you a little bit about what cash flow is and how it affects your business.
Here’s a nugget of honesty. For most businesses that fail, the number one reason that they fail is that they lack money. Even businesses that are profitable have cashflow issues or can have cash flow issues, so I don't want you to misinterpret a couple of things. The first thing I want to tell you is that your profit and loss statement is not the same as cash flow. Two totally different things that are both very, very important. I don't want you to confuse the two as we dive in!
What is Cash Flow?
Very simply, cash flow is essentially what comes in your bank account minus what goes out of your bank account. Nothing about profits here, right? It's just what goes in minus what comes out - that is your cash flow. It's important that you are tracking this and you're looking at this on a regular basis. To be clear, when I say regular, I want you in there every single day. If you can't do it daily, at least do it every three to four days. That would be extremely helpful to you in your business.
So let's talk about what goes in. What are some things that go into your bank account? The first thing I want you to think about is revenue, right? You're in business, you're making money. That's your income, those are things that you are collecting for services or products that you may be selling, that's revenue.
Other things that could come into your bank account that affects your cash flow are loans. Maybe you took advantage of the PPP loan, right? That would be money going into your account. It may be loans from a bank, it may be some loans from a credit card that maybe you've taken, and the other thing could be owner's contribution. You as an owner could put your personal funds into your business banking account. I’ve mentioned it before, but if you haven't already seen the video or have seen any of my posts, I highly recommend that you're keeping separate banking accounts for business and for personal! Highly, highly important. Step number one, right. So, things going in deposits are going to be revenue, sales, income, loans, and owner's contribution.
On the other hand, the things that are going to come out of your bank account on a regular basis are business expenses. It may be cost of goods, it may be advertising, it may be paying a virtual assistant, it may be payroll, it could be supplies, the cell phone bill for your business, those would be business expenses that are coming out of your account. Another business expense is when you pay yourself, and I hope that you guys are paying yourself on a regular basis! If you're not doing it weekly or bi-weekly, I highly recommend that you at least do that on a monthly basis - but you need to be paying yourself out of your business.
Finally, personal expenses. Remember, let's rewind, I told you to keep separate business and personal checking accounts. Sometimes, even though it's not ideal, you may find yourself swiping that debit card for your business for something that's personal and that's still coming out of your account as part of cash flow. We have to include that as well, and those things would not be included on a profit and loss statement. That's why it's different.
Now that you know what cash flow is, think to yourself, how many times have you opened your bank account and it's in the negative? Or maybe you look at your bank account, and you see the balance is $500, but you just wrote a rent check yesterday for $1000. You know that check is going to bounce, or the bank's going to pay it, and then they're going to charge you insufficient funds fees for that. Those are issues with cash flow, and there are so many reasons that you could have issues with cash flow in your business, even if it's profitable.
One of the things that I see on a regular basis is that owners are just so caught up in the day to day of doing work for clients that they forget to send their invoices. It happens, and I have fallen victim to that myself! We get busy and just forget, right? I now have a system set up in my business so that I don't worry about sending invoices, it’s all done automatically. It's just done, and I know that I'm going to get paid.
Another issue is that maybe you do send those invoices, but your clients are not very quick to pay you. Then you just let it slide, right, you send an invoice 30 days ago, and they didn't pay you. Then 30 more days go by and you're like, “Oh, wow, I didn't check up with that client.” So now I feel bad, right? You’ve been there, I've been there. What happens is you're doing so much work, and you have expenses against that work, but then you're not getting paid. So money is going out of your bank account for payroll, assistance services, maybe your own pay, but nothing was coming in to offset it. That's an issue with cash flow.
Another issue that I see with cash flow a lot is that you're not tracking your income and your expenses, so you have no clue what it's really costing you to run your business. I'm all about a breakeven point and when I work with my clients, that's one of the things that we talk about. What is your breakeven point? Do I want you to be more successful than just breaking even? Of course, I do! But we first need to know where that breakeven point is so that we can back into the number to really set goals for your business.
A Few Tips…
1 - Collect Money Faster
This can be done in several different ways. The first is to automate your invoicing - super, super simple. If you're using QuickBooks, this can be done very easily. If you're using an onboarding app or software such as Dubsado or HoneyBook, it also can be done straight through there and you have your workflows in order.
2 - Offer Incentives
In order for people to pay quicker, maybe you can drop some incentives to encourage that. If their invoice is due in 10 days or due in 30 days, give them an incentive to pay it sooner and then also stagger your invoices. So many companies I see bill one time a month, but your bills are not due just one time a month and sometimes it's hard to stretch those funds in order to budget for 30 days. I recommend staggering your invoices at least twice a month instead. That can be done, again, automatically in QuickBooks, or through your onboarding software.
3 - Space Out Your Income & Expenses
With your invoices, don't bill one time a month, bill strategically throughout the month. Look at your expenses, see when most of them are due, and that's when you want to collect most of your money. The other thing with that is your expenses, maybe you've noticed that most of your expenses are due on the first. Did you know that you could call your credit card companies and stagger those payments? You can stagger your utilities and pay half on the first and half on the 15th. That will undoubtedly help you with cash flow.
4 - Cut Your Expenses
Look at your expenses, see how much you're actually spending, and cut it! Seems simple, but most people forget this one. Where are you spending? Is there a return on the investment? If you have a subscription that you've been paying for three months, and you haven't even opened the website, it's time to cut the subscription. You can always sign back up when you’re ready to use it full-time. I say that because I've done that before! I had a Kajabi subscription for six months because I just knew I was going to convert to Kajabi…but I never did, and Kajabi is pretty expensive. So, take my own advice here and cut expenses that you are not using.
Bonus Tip - Get your books in order!
There's no way for you to know how much you're collecting in revenue, there's no way for you to know how to stagger your income or your expenses, and there's no way for you to know how to cut or what to cut in your expenses if your books are not in order. You're just throwing darts otherwise, you really have no clue.
I can't tell you enough, I see so many entrepreneurs who go into business, and they spend so much time and so much money on advertising and websites, and all the software subscriptions. But the one thing that's going to keep their business alive and not able to fail is their finances! And they forget that. They forget it because it's not fun, right? I mean, I'm in business for myself, I love numbers. But my personal finances, that's not fun.
What's fun is making new services and doing ads and talking with other customers and clients on Facebook and simply communicating. That's what's fun for me. So I can only imagine what's fun for you and your business, and normally finances are not it.
If finances are not your thing, I get it, but it doesn't mean that it doesn't need to be done. So if you're struggling with cash flow problems, the number one thing to do is to get your books in order. And yes, I'm a bookkeeper! Do I want to do your books? Of course, I do! But even if I don't do them, and it's not time for you to outsource, I get it, some businesses are just not to that point, do it yourself. If you're not there, and you know you can't afford it, don't do it. There are several options for you out there to do your books yourself.
Quickbooks is my favorite option. If you're going to do QuickBooks yourself, I urge you to do lots of training because QuickBooks is super simple on the surface, but it's not so super simple once you get into it and you don't know the terminology. The other option for you to do is to use a spreadsheet, specifically, my spreadsheet called the Calculated Tax Planner. It's super simple. You enter your income, you enter your deductions, and it tells you what your profit or loss is as well as what your cash flow looks like. That's great to know on a monthly basis and even better come tax time so all your books are ready and it's done for you. So if you'd like the planner, download it here.
Don't wait until it's time to do your taxes to get your books in order because then you're only doing your books for compliance. You're not doing your books to gain any knowledge at all about your business to make any changes to grow your company!
If you’re ready to have expert hands-on your business finances so that you can understand your position each month, make informed decisions, and stop trying to DIY - let’s chat! Click Here to book your complimentary consultation.
