If you don’t think that cash flow is important, then ask the nine out of 10 small business owners whose businesses failed due to poor cash flow just how important it is.
Good cash flow management begins with having a clear understanding on where cash enters and exits your business. It also involves keeping an eye on the long-term so that you’re not surprised by any cash flow problems, such as the following surprises.
Besides being aware of any surprises, you also need to have a plan to avoid and handle them in the first place.
1. Lack of profitability
Did you know that only 40 percent of businesses are profitable? Even worse? 30 percent break even while another 30 percent continually lose money.
While a lack of profit is one of the main reasons why a business fails, some business owners believe that just because they’re currently turning a profit means that they don’t have any cash flow problems. The truth is that profitable businesses of all sizes and stages can run into cash flow problems, which will ultimately force them to close their doors for good – especially when you have high business expenses and constantly reinvesting profits back into your business.
Remember, you’re only profitable after there’s revenue in your bank account and you’re paid all of your expenses.
How to avoid lack of profitably: Be on the lookout for profit-making opportunities like product markups, becoming a consultant, adding new products or services, offering freebies or discounts and constantly learning new skills.
2. Late payments
In a perfect world a client would pay his or her invoice on-time. Unfortunately, that’s not a reality. That becomes a cash flow problem when you’re banking on that income before you even received the payment. In fact, small businesses are now waiting an average of 72 days for payment of invoices. And, that can put your business in jeopardy since that means you can’t pay your bills on-time.
How to avoid late payments: Brush-up on the best practices for billing. This includes using cloud-based invoicing software, requiring a down payment, accepting multiple forms of payments, following-up with clients who haven’t paid on-time and having a plan for clients who refuse to pay the invoice.
3. The unexpected
Let’s not sugarcoat this. There will be unexpected and unanticipated costs that you’ll have to tackle. It could be anything from a key piece of equipment breaking down, a natural disaster damaging your office, responding to a negative customer complaints, having to change your business model, or losing one of your top employees. All of these can definitely impact your cash flow almost instantly.
How to avoid the unexpected: It’s impossible to predict each and every possible outcome. The best thing that you can do is take as many preventive measures as possible. For example, creating a cash flow forecast for the the next six to 12 months gives you the chance to build an emergency fund so that you can handle most of these unexpected scenarios. Other steps you could take would be to have insurance, provide amazing customer service and retain your top-performers.
For some businesses this is obvious. For example, if you’re a landscaper in the Northeast, then you can bet that once winter hits you’re not going to have a whole lot of customers contacting you. Sometimes there are seasonal fluctuations that you may not anticipate. For instance, if you’re a year-long nursery and your biggest sellers are Christmas trees, then you may run into cash problems throughout the rest of the year.
How to avoid seasonality fluctuations: The above-mentioned cash flow forecast not only could clue you in on seasonal fluctuations, it can also help you set aside enough money to pay your bills when business has dried-up. You can also diversity your business your business so that there’s consistent cash flow. A landscaper could provide a snow removal service during the winter.
It doesn’t matter if you’re a monthly, quarterly or annual filer, it’s your responsibility to file the appropriate amount of taxes you owe on-time. Remember, if you don’t filed your taxes or make an error, you could be subject to to penalties, interest payments and even an audit from the IRS.
How to avoid tax problems: Mark on a calendar your tax deadlines and speak with a tax specialist. They can make sure that your taxes are in-order and can also help you find deductions. Also make sure that you have enough money set aside to pay your taxes. Although it may not be the exact dollar amount, you can look at last year’s taxes to at least get a ballpark figure.
6. Withheld funds
Investors and banks can withhold funds if your business hasn’t been able to meet expectations or your incomings are less than what was expected. This becomes a cash flow surprise when you go to secure a loan for a broken piece of equipment only to be turned down because you’re a risk.
How to avoid withheld funds: When you initially request a loan, ask for a little more, like around 25 percent, as well as a line of credit. This should help you cover any emergencies without having to ask for more money.
7. Unanticipated growth
While growth is a definitely a goal, unanticipated growth can catch you off-guard. Remember, the more you business grows the more cash you need to pay for staff, a larger property, and more products and services. Those are all expenses that can’t wait until you have more cash flow.
How to avoid unanticipated growth issues: Implementing a business system in advance gives you the chance to test out the systems that work best for your business. For example, finding invoicing software that has features like recurring billing and sending automatic payment reminders removes those time-consuming administrative tasks. Now that you’re free from those tasks, you can focus on tasks like generating more revenue to handle this rapid growth.
Related: Do This to Improve Your Cash Flow
8. Hidden costs
No matter how prepared you are there are bound to be some hidden costs that slip through the cracks. It could be employee turnover, taxes, legal and accounting fees, repairs and replacements, permits and licenses, insurance, shrinkage, credit card/loan interest and utilities. Some of these may seem insignificant at first, but they can quickly add-up until they make a dent into your cash flow.
How to avoid hidden costs: You can’t completely avoid these hidden costs. However, I would find a mentor or fellow business owner and discuss the hidden costs that they’ve experienced. I would also sit down and create budget so that you’re aware of all of your expenses you have each month and then plan accordingly.
This article was originally posted here on Entrepreneur.com.
Financial Literacy Key To Business Success – Especially In A Tough Economy
What can South African SMMEs do to position themselves for success in tough economic times? Arming their people with basic financial literacy is a good place to start argues UCT Graduate School of Business Associate Professor Mark Graham.
In times of economic hardship, good financial and management skills in a business can make all the difference. According to a recent article in Business Day, international investors are sniffing about South African SMMEs that have proven themselves to be well-run during this time of subdued economic growth – and are also attractively undervalued.
Strong balance sheets and stable management in an environment of slow growth economy with low liquidity adds up to some bargain long-term investment opportunities for international consortiums it seems. Among those who have been involved in investment or buyout offers in the past few months are Clover and Interwaste.
It seems self-evident to suggest that well-run businesses attract investment and success. But what actually makes a business – of any size – well-run in the first place?
There is obviously no short answer to this; good leadership, a clear strategy and a strong and motivated workforce all play their part, but one factor that is often overlooked is financial acumen – throughout the organisation. While the accountants and members in the finance team are expected to understand the numbers, this is not always a core competency required in other departments. Yet, having a good working knowledge of finance at every decision-making level, from new managers to members of the board, can be key.
Even if people don’t need to know a lot about finance in their day-to-day job, the more conversant they are on the subject, the better off they – and the business – will be, according to Richard Ruback, a professor at Harvard Business School and the co-author of the HBR Guide to Buying a Small Business. “If you can speak the language of money, you will be more successful,” he says simply.
Financial savvy will give the marketing manager the ability to demonstrate not only that something is a good idea/product or service, but that it makes financial sense too, for example. And it will make sure that the people in the HR team understand more clearly why reducing staff churn is a good idea not only for company culture but for the bottom line as well.
A knowledge of some basic financial decision-making tools (the all-important balance-sheet, for example) and an appreciation of the difference between profitability and cash flow will ensure that non-financial managers are more likely to effectively participate in business strategy and decision-making. Someone who understands the financial statements of a business understands the business in a way that is not otherwise possible. It’s like looking beneath the hood of a car and understanding how it all fits together and why the car can move forward – or not.
Such people can more confidently identify potential problems and inefficiencies before they impact the overall financial performance, because those warnings are almost invariably reflected in the financials first – and often at departmental level. Critically, they can also help identify financial irregularities, enabling them to call out and stop fraud and corruption in its tracks.
Equipping its people with financial skills is therefore a good strategy for a business looking to position itself for growth and investment. And it makes sense for individuals too – Joe Knight, a partner and senior consultant at the Business Literacy Institute in the US and the co-author of Financial Intelligence, says that an absence of financial savvy is “career-limiting.”
Let’s not ignore the fact that there are challenges however. Finance matters tend to scare a great many people. Traditionally, these areas of knowledge carry the stigma of being impenetrable, and financial literacy is not ideally developed at early levels. According to a study by the Financial Services Board, South Africa currently has a financial literacy rate of just 51%.
This means that roughly one out of every two people is likely to prefer to abdicate from financial decision-making – leaving it to the “numbers” people. But with some intervention and training it is possible to empower individuals to decode these mysteries and get to grips with the language of finance.
All things being equal, it’s not pure luck that allows some businesses to operate well and thrive while others fail. Well-run businesses are generally run by well-informed people. In short, decision-makers who don’t understand basic financial concepts and the language of finance simply don’t know what is going on.
While the SA government is currently talking up the need for foreign direct investment to rescue the country from the economic doldrums, there is much that ordinary businesses can do to position themselves for success. And ensuring that their people are adequately equipped to understand the nuances of business through the language of finance is perhaps a good place to start.
Trade Agreement Tips That Will Save You Costs
If you are looking to benefit from trade agreements, you need to keep the following advice in mind.
Trade benefits all parties involved. When a country has scarcity of certain resources or lack the capacity to satisfy their own needs, they have the opportunity to trade the resources which they produce in surplus, for the products they need or want.
When goods are transferred from one country to another, it stimulates the economy as products and money is switched between hands. Over the years, the competitive nature of moving goods from one country to the other, negotiating prices and opening new markets has caused certain agreements to immerge to promote trade between the member countries.
A trade agreement is an arrangement between two or more nations in order for goods to move more easily between borders with mutually beneficial tariffs imposed on imports. These agreements ensure that duty tax is removed or reduced on condition that the importer and exporter provide the correct documents. This is all the more reason for traders to familiarise themselves with the current trade agreements in place.
Tip1# Know Whether You Export To Or Import From A Country With A Trade Agreement
There are a few trade agreements that you need to be aware of which will significantly cut duty tax. The Southern Africa Development Community (SADC) Free Trade Agreement (FTA) is one of them. The fifteen SADC member states included in the agreement enjoy an impressive 85% free trade on goods.
Another trade agreement commonly used by South Africans is the South African Customs Union (SACU) which allows duty tax free movements of goods. This means zero duty tax is payable on trade between these countries. Trade agreements with European countries include the SADC-EU Economic Partnership Agreement (EPA) and the SACU European Free Trade Association (EFTA). We have prepared a list of all the trade agreements as well as the countries involved here.
Tip 2# Know Which Certificate Of Origin Is Necessary For The Specific Trade Agreement
Only traders who can prove that goods were produced or processed in a member country may benefit from these agreements. This is why importers and exporters need to submit paperwork attesting that the goods were made in the country listed as the beneficiary of the trade agreement. The proof provided is called a ’Certificate of Origin’.
A certificate of origin often abbreviated to C/O or CoO is a printed form or electronic document completed by the exporter and certified by a recognised issuing body, validating that the goods in a particular export shipment have been produced, manufactured or processed in a particular country.
The exporter has to submit proof that either a) the products were wholly obtained from that country; this means all components and manufacturing originated in that country, or b) that it is sufficiently processed in the country of origin.
In other words, although some components might have been imported, the product was sufficiently transformed, or value was added in such a way that the final item can be deemed as new or original. Furthermore, if a company was registered in one country and the manufacturing plant in another, the certificate of origin would be issued from the manufacturing plant’s country. There are various certificates of origins used for different countries. Read here for more details about the different documents required to ensure you benefit from lower duty tax.
#Tip 3: Ensure The Certificate Of Origin Is Completed In The Right Manner
These documents must be completed correctly. Most of the information provided has to come from the exporter. If the wrong information has been reported, it can influence the relationship between the importer and exporter negatively.
Common mistakes when filling out a Certificate of Origin may include:
- Identifying the wrong country of origin
- Using the wrong H.S. code
- Providing an incorrect or incomplete and rather ambiguous description of the goods
- Not including a description on how the cargo is packed or reporting a total weight that does not include packaging
- Exporting goods made from imported material and not sufficiently processed to be deemed as originating from the exporting country.
A lot of information can be misrepresented on the certificate of origin. For this reason, we recommend making use of companies specialising in trade administration to ease the stress and to ensure that all the t’s are crossed and i’s are dotted.
Backing You With Smarter Tools
Manage income, track expenses and do more with the ultimate toolkit for your small business.
You work too hard to work this hard. The good news is that you don’t have to break your back or the bank to run a successful business. Managing your business is easier when you’re using smarter tools with QuickBooks.
Since its launch over 20 years ago, QuickBooks has aimed to power prosperity for small businesses and the self-employed with services that help you with income management, expense tracking and more, allowing you to focus on growing your passion.
The new “Backing You” campaign extends this commitment to support small business owners through the challenges of business ownership – with a little help from Danny DeVito.
“The importance of small business is personal to me. At a young age, I watched both my parents and my sister build their own business from the ground up and struggle to balance family obligations with growing their businesses,” says DeVito.
“When Intuit QuickBooks approached me for this campaign, I felt this was a way that I could give back to this very important industry, show them how to make their lives easier and make them laugh along the way too.”
QuickBooks gives you a set of business tools that’ll do all the hard work for you, making sure you get the time to do what really matters to you. “Because collecting receipts is so 80s, and who has time to chase payments?” says Danny.