Small Business Financial Advice

Many of my acquaintances have attempted to start their own businesses over the years. At least 70% gave up within 12 months, because they failed to turn a profit. The biggest mistake most of them made was poor cash flow management.

My anecdotal observations are consistent with years of formal research.  A study from U.S. Bank found that 82% of all business failures are caused by inadequate cash flow management. If you want to run a successful company, addressing financial problems is your top priority. Here is some important small business financial advice you need to review.

1) Create 24-month projections for your expenses and use irregular cash inflows to cover them

A few years ago, an entrepreneur friend of mine received a substantial windfall from a new client. She invested that money in a green screen for a side project that she didn’t need. Three months later, she was unable to make a payment for the property she was leasing.

This is a very common mistake with small business owners. They get excited when they first get money, but fail to project their long-term expenses. They blow through their cash reserves and are unable to cover their expenses down the road.

You need to project your long-term expenses and set aside cash reserves to pay them. Don’t get overly confident if you get a large sum of money, because you can’t be sure that you will be getting another large influx of cash anytime soon.

2) Store cash reserves for long-term expenses in C.D. accounts

Most business owners store their cash in short-term savings accounts. This is a mistake if you need the money to cover long-term expenses.

If you need money to pay for expenses that are over six months away, it is a good idea to save the money for them in a Certificate of Deposit (C.D.). The average savings rate on most conventional savings accounts was only 0.01% in 2013, compared to 1.5-1.7% for C.D. accounts. This will help you make sure that your money goes to good use.

Don’t forget to adjust the amount of money you set aside for taxes as your expenditures increase. Many companies are overly optimistic about the possibility that new tax reforms will get passed, but it is unlikely they will be as favorable as they expect.

3) Offer reasonable incentives to collect accounts receivables on time

Collecting revenue from customers is possibly the most important aspect of running a business. You can deliver the best services in the world, but your company will still fail if you can’t get your customers to pay for them. You can be excellent at managing money, but it won’t do you any good if you don’t have any money coming in to manage.

The bottom line is that you need an effective accounts receivable collections strategy. Like it or not, customers aren’t always going to pay on time. Even a 10% delinquency rate can cause massive problems for your company’s bottom line. Here are some ways to encourage customers to pay on time:

• Offer discounts to customers that pay before the due date. One company I worked with was able to reduce their delinquency rate by 20% by offering 3/30 net/60 terms instead of collecting the full balance at the end of 60 days.
• Charge a penalty for companies that pay late. Make sure any penalties are clearly stated in your service contract.
• Report excessive delinquent accounts to business credit reporting agencies and remove them after payments are made.
• Reach out to customers that pay their bills on time and offer tokens of appreciation, such as vintage wine or invitations to your office Christmas party. Customers will be more eager to pay their bills on time when you make them feel like family for their loyalty.

Focusing on positive incentives is a better way to encourage people to make their payments on time. However, you need to make sure customers are aware of the repercussions as well. These should be covered in your contract and briefly discussed. You don’t need to make things awkward by over-emphasizing them, but they must at least be aware they exist.

About our guest contributor

Megan Totka is the Chief Editor for ChamberofCommerce.com. Chamber specializes in helping small businesses grow their business on the web while facilitating the connectivity between local businesses and more than 7,000 Chambers of Commerce worldwide.

As a small business expert, Megan specializes in reporting the latest business news, helpful tips and reliable resources, as well as providing small business advice. She has significant experience with the topic of small business marketing, finance, technology and more.