Crazy to think there are only two more weeks until Christmas and only three more weeks left of 2023. There’s a lot of joy still to be had and opportunities for your business to increase revenue
And, while the rest of us are checking off our holiday shopping lists, the IRS is continuing its aggressive focus on checking off false ERC claims. Again, if you were one of those who were lured in by ERC mills but weren’t actually eligible for the claim, this is something you’ll want to deal with ASAP. (I’m here for you.)
While this time of year usually signals increased revenue for a lot of my clients, rising costs and the Fed’s interest rate hikes have made it extremely difficult for a lot of businesses to stay afloat.
Inflation alone has negatively affected the cash flow of 48 percent of small businesses in the last six months nationwide. And businesses in some sectors are struggling to hold up to the challenge — tech startups are especially crumbling right now. Also, 40 percent of small businesses reported this year that limited or inconsistent cash flow was their top financial challenge.
So if you would place yourself in that group, you’re not alone.
This is not a new problem historically, and the start of a new year is when businesses are typically thinking about how to fix it proactively. I’ve watched many, many businesses over the years struggle through the cash flow crunch, and some of them fail because of it. Inflation is only accentuating the battle for available funds to pay bills, make investments, and meet payroll.
I’ve shared many financial strategies to achieve positive cash flow with these struggling business owners over the years, and today I want to share some with you. If you want to discuss this more thoroughly in the context of your own books, set up a time to talk:
218-623-6050
Let’s start here…
Achieving Positive Cash Flow For Your Business’s Health
“You must gain control over your money or the lack of it will forever control you.” ― Dave Ramsey
Cash flow management is a daily exercise in a small business, and the goal is always to achieve positive cash flow. That is to say, there is more cash coming in than going out. If you’re reading this article, you’re probably not there.
And that’s a problem because if you want to grow a sustainable and healthy business, you need positive cash flow (extra cash) to do that — for inventory purchasing, equipment, and technology upgrades, additional staffing, marketing and advertising, and on and on. You know exactly what I’m talking about because your own list of needs is perpetually hanging over your head.
Where to start?
Cash Flow Statement & Forecasting
If you don’t have one of these in your repertoire of data reports, this is a great place to start. This report summarizes the cash coming in and the cash going out during a given period. In its simplest form, a cash flow statement represents this basic equation:
Cash on hand minus expenses equals cash flow
However, a cash flow statement is limited in that it doesn’t take into account future transactions. For businesses that are dependent on seasonal dynamics, as one example among many, cash flow forecasting is essential.
Cash flow forecasting is what its name implies: a tool to estimate future income so you can fulfill obligations, anticipate expenses, and establish a realistic plan for growth.
Without the data that these reporting tools provide, the tendency is to make uninformed decisions about how much to increase prices and which expenses can be cut (marketing is typically the first to get prematurely slashed).
Cash Flow Scenarios
One of the ways an accountant can help you achieve positive cash flow is by building out various future scenarios and establishing how to respond. Let’s look at a few examples.
Scenario 1: Late-paying customers
You’re facing a cash flow crunch because some of your clients consistently pay their invoices late, causing you to struggle with bills and payroll.
Possible lever to pull: Implement clear payment terms and follow up
Start by more clearly outlining payment terms on invoices, specifying due dates and late payment penalties. Follow up promptly when invoices are overdue. (Automated invoice reminders can help streamline this process.) You could also consider offering discounts for early payments to incentivize prompt settlements.
Scenario 2: Seasonal revenue fluctuations
An ice cream shop in a beach town, a snow plowing service, a farming operation, a mowing and landscape management company, or any business experiencing a significant drop in revenue during their off seasons.
Possible lever to pull: Diversify offerings and build reserves
During the off season, introduce new services or products. It’s also crucial to set aside profits during the peak season to cover expenses during slow periods.
Scenario 3: Excessive inventory
Your excessive inventory is tying up capital, leading to cash flow constraints.
Possible lever to pull: Optimize inventory management
Closely monitor inventory turnover rate and adjust purchasing accordingly. Consider running clearance sales for slow-moving items or bundle products to encourage sales. Implementing inventory management software can also help in maintaining the right stock levels.
Scenario 4: Unforeseen expenses
Unexpected costs strain cash flow.
Possible lever to pull: Emergency fund and financing options
Having an emergency fund in place can be a lifesaver in such situations. Set aside a portion of profits for unforeseen expenses and explore financing options like a business line of credit to cover immediate costs while preserving cash flow.
The freedom that positive cash flow can provide allows you to tackle other issues of financial business health: increasing savings, reducing debt, or expanding into new markets. Let’s work through your scenarios and start creating solutions:
218-623-6050
We’re with you,
The TCG Accounting Team
