Archive for Business Finance

Don’t Confuse Cash Flow with Profits

Old Accounting Ledger with alphabetical tagCash Flow and Profit are two concepts that can be confused, particularly by business owners who are unfamiliar with the accounting techniques used for recording Sales and “Accounts Receivable” when running a business.

It is possible to make a Profit and still be caught in a cash flow bind. And cash flow problems can put you out of business in spite of making a profit.

Cash Flow is Very Different from Profits

Profit represents the excess of your revenues over your expenses. Put simply, your Sales revenue in any given time period exceeds your business expenses for the same period.

Cash Flow represents the actual flow of sales receipts and cash disbursements in your business. You receive payments for your Sales and deposit those payments in your account. You then make disbursements for your expenses.

If your expense disbursements are less than your receipts, your cash flow is positive.

If disbursements are more than your receipts, your cash flow is negative & must be covered by borrowing or by some other means.

Keeping Both Profit and Cash Flow Positive

To succeed in business, you need to make a profit and you also need to have positive cash flow.

Actual business losses will ultimately create cash flow problems – that’s pretty obvious.

But here are some typical scenarios that can sneak up on you to create cash flow problems:

• Letting your Accounts Receivable aging get out of control will ultimately hamper your cash flow.
• Building up inventories that are paid for with current cash can be problematic if there is much of a time lag between the purchase of the inventory and the sale of the products.
• Investing in fixed assets such as capital equipment, tenant fit-out, office furniture or equipment expenses can use up significant amounts of current cash, so proceed carefully.
Not keeping accurate records about project and business expenses can make it seem as if there is more cash in the business than there actually is.
Incorrectly accounting for deposits on projects can also backfire. When you receive a deposit at the beginning of a job, your expenses for the job have not yet been recorded, so your cash balance includes money that is probably already committed to expenses that aren’t yet showing on the books.

Don’t Get Caught Short

To stay on top of cash flow:

• Keep accurate business records and remember that competent Bookkeepers are good business investments.
Be clear about your payment terms with your clients & stay on top of your collection process. A good bookkeeper can help with that too.
Run credit checks on your clients before extending them credit. If they can’t pay you, their cash flow problem will quickly become yours.


Avoid Cash Flow Woes

Managing your business’ cash flow is as important as watching your bottom line.  Small businesses and startups operate on tight budgets and sometimes shoestrings, so cash management is critical for survival.

Two of the most common pitfalls that occur with cash flow are:

Mistaking Cash Flow for Profit

This usually affects businesses that receive substantial deposit money upfront (e.g., construction), but that aren’t accounting for job costing and deposits correctly. When business is busy and a lot of upfront money is flowing in, owners can easily overspend and then be caught short of cash at the end of the project.

Mistaking Profit for Cash Flow

Focusing only on the bottom line without keeping a close eye on cash flow can destroy a business. A cash flow crunch happens when a business’ accounts receivable and accounts payable age on incompatible timelines. For example, if your collections from clients age substantially, but your payments to vendors are due quickly, you can end up in a cash flow squeeze that can bring your business to its financial knees.

Avoiding a Cash Flow Crisis

There are a number of ways you can stay on top of your cash flow. It starts with keeping accurate and up-to-date financial records and reviewing them at least monthly. Better yet, review your customer accounts receivable aging weekly to make sure customers are paying you on a timely basis. Keep an eye on your Accounts Payable aging too. If your accounts payable shows that your business is starting to accumulate a bunch of overdue bills, it indicates a cash flow problem.

Good record-keeping is critical to managing a healthy business. Hiring a bookkeeper to handle this task for you can be an excellent investment on two counts: you’ll have a timely and accurate financial picture and you can spend your time building your business, instead of attempting to keep up with collections, orders, purchases and job costing minutiae at midnight.


Crisis Management vs. Manufactured Crises

Politicians all proclaim that they are “friends” of small business. Clearly, they don’t know what being a friend means. If they were truly supportive of small businesses they would stop manufacturing crises and start dealing competently with the strategic issues facing the country. From immigration to taxes to defense to lending, they just keep on kicking the can down the road. If small business owners took that approach, we wouldn’t be business owners very long.

Congress keeps lurching from event to event, all of which have major economic consequences for consumers, taxpayers and businesses. The so-named Sequestration is only the latest manufactured crisis. Congress created this mess because they couldn’t reach agreement and, once again, chose to postpone governing.

So what’s the result?

Congress puts band-aids on serious tax and spending problems by making short-term and short-sighted policy decisions at the very last minute. Small businesses are casualties in this process. We can’t plan effectively; we don’t know if we should hire; we don’t know what the tax code will look like next year; and we certainly don’t think anyone is actually in charge in D.C.

No matter what your political perspective is, we’re all suffering from this chaotic approach to governing. “Just say no” wasn’t very effective with drugs and it doesn’t work well with financial and economic issues either. The point of negotiating is to come to agreement so that everyone can move forward. Business owners do it all the time. It’s not that difficult a concept to grasp.

Business vs. Government

I don’t subscribe to the idea that if you’re good at business, you’ll be good at governing. Maybe yes; maybe no.  The big difference that I see between politicians and business owners is that we try to avoid crises and they seem to enjoy them.

Maybe it is politicians’ love of sound bites that promotes this. After all, giving quirky names to bad policy and ineffective governance generates lots of air time. Terms like Fiscal Cliff, Federal Default, and Sequestration are handy short-hand for tweeting and banner headlines, but then we are all left holding the bag when reality hits.

Right now small businesses are trying to survive in a constant state of government-inspired crisis – with no real end in sight. Small businesses employ half the U.S. private labor force. Give us some stability and we just might be able to give this so-called recovery legs to stand on by creating more private sector jobs.


The Business Will Pay for It

expense report photoWhat a loaded statement that is, but I’ve heard it a thousand times. “The business” isn’t some disembodied entity with limitless cash resources. If you’re a small business owner, the business is you.
So, you’re paying for it…whatever “it” is.
For most people, the translation of this phrase means that it’s a deductible business expense and so therefore the true cost is somehow discounted. But just because “the business will pay for it,” doesn’t mean it’s a good way to spend money…and it is your money if you own the business. This line of reasoning is particularly prevalent among small business owners who came out of corporate and had a business expense account. In that case, the business was paying for it. Now that you are the business, you’re paying for it and it is important to understand that distinction.
When choosing which business expenditures to make, evaluate them in light of their absolute cost and decide if it’s worth it or not.  Just because something is tax deductible doesn’t make it a smart business move. Some business owners push the envelope on this business expense issue, especially around entertainment expenses. Don’t get caught in the trap of “letting the business pay for it” if the expense is actually a personal one and it doesn’t have a legitimate business purpose. If you’re audited and the deductions are disallowed, you could be facing a hefty tax bill along with penalties or interest.

Speeding Up Accounts Receivable Collections

paid invoiceAll business owners know that collecting money from customers can sometimes be a frustrating and lengthy process.  This can be particularly tricky in a service or consulting business.
When selling products, businesses often collect a deposit or get paid in advance before shipping but consultants tend to bill after their services are rendered. This means you effectively don’t have any leverage with your client. And if you don’t have someone else doing your accounts receivable collecting, you are also placed in in the uncomfortable position of pursuing a client over a bill at the same time you may be pitching them for new business.

There are a several techniques that can help.
1.  Get a retainer up front if you can and apply it to the final invoice, not the first.
2.  For a fixed fee project, break the project’s deliverables down into billable sections and send the bill in a timely fashion so that you don’t go too much further in the project without being paid for the work already done.
3.  Accept credit cards so that it is easy for your client to pay. This can be particularly effective when dealing with other small business owners when their cash flow is tight.
The downside of using credit cards is that you’ll be subject to fees. But that’s just a cost of doing business and can be calculated easily when you are deciding whether or not to offer this. If you don’t already accept credit cards, a fast and easy way to do so is with a PayPal business account. It allows you to accept all major credit cards and you can even invoice your clients directly through PayPal via email. The information can be downloaded directly into your QuickBooks accounting file and easily transferred to your bank account.