By Al Lopez, EGBI Executive Director
Start-ups and small growing businesses face a common problem: how to manage cash flow so that all the expenses get paid on time. By managing your expenses carefully, you can improve your opportunity to grow slowly and surely. Here are a few tips on how to do that:
Tip #1: Create a realistic budget
It’s not just enough to come up with a budget – you also have to come up with a realistic budget. And in order to do that, you need to have a good understanding of all aspects of your business. Take sales, for example. If you know when you are booking key sales, and when these customers are going to pay, you are going to have much more visibility into the overall profitability and the when that profitability will come. If you know that you can expect an amount in revenue a month, then you can start thinking in terms of affordable dollars in expenses.
At a minimum, you should have visibility into the sales for your upcoming three months. Preferably, you should be able to project out 12 months in advance. This is particularly important because every business naturally has ups and downs in sales over the year – such as during the holiday selling season – and those ups and downs need to be planned for.
Tip #2: Develop a solid business plan
Once you have a budget in place, you need to make sure you have a business that supports it or change the one you have to match your new budget expectations. Start to think about what percentage of your profits you will need to invest back into the business. Maybe you have to buy new inventory or maybe you need a new piece of equipment. Or maybe you are planning a new marketing approach to promote your product or service.
A business plan helps you to understand how these costs fit into the bigger picture and keep you from spending on things that aren’t part of your plan. Too many businesses live week to week, month-to-month, or quarter-to-quarter, and are never able to put together a solid business plan for moving forward. Expenses tend to grow with nothing to show for it. A business plan helps to keep you focused, and helps you manage your expenses more wisely.
Tip #3: Plan for unexpected expenses
The business world is full of uncertainty, and that’s why most small business consultants advise companies to have enough cash on hand to handle any unexpected emergencies. In the same way as you might create a “rainy day fund” for your family budget, you’d also want to make sure that you have enough cash to cover adverse market changes or unexpected events for your business.
There are various ways to protect against risk, of course, without simply having to save a bunch of cash. You don’t want to tie up too much cash, because you’ll need that for working capital. But you should have business insurance to protect your inventory. Or, if you operate a food truck business, you might think about ways to limit your downside if anything happens to these valuable assets.
At some point, all of the cost savings, bootstrapping and careful financial management will really pay off. You’ll have extra funds to handle unexpected emergencies, and you’ll also have plenty of funds to re-invest in the success of your growing small business.