I’ve been speaking with a number of small business owners, all of whom seem to be asking the same question: “What do I do when I’ve lost several customers because of their financial troubles, and other customers have canceled their sessions or are paying late?”
These same individuals also report that last year, business was growing nicely, clients were happily paying their fees and the checks were rolling in. Last year they could afford the luxury of setting their own hours, but now it seems they have to stretch to adjust their hours to meet clients who are limited in their own time. Lately, business has become too quiet. Accounts have dipped unexpectedly, and many have realized quite suddenly that if this continues, they might not have enough money coming in to meet next month’s expenses.
No doubt about it, money is tight and for most self-employed this means that if you were making it from paycheck to paycheck before the downturn, you aren’t now! As economic reality is settling in across the globe, many are feeling the pinch. In the past, cash advances from credit cards were a quick and easy way to gain access to cash. But as a long-term financing method, they are proving to be expensive and devastating for businesses unable to keep up with timely payments.
The squeeze can have many effects, and not all of them financial. Stress leads to depression, which leads to decreased productivity, poor customer service, sloppy business procedures, and declining sales – and the cycle continues.
So I hear, “What can I do to manage my business finances smarter – not harder – and continue to build success in my small business”?
The economic downturn is causing most of us to really take a good look at the state of affairs worldwide, but it is also inspiring us to catch sight beyond the immediate global horizon to position ourselves en route for riding out the crunch. It's a challenge for even the most savvy of solo-entrepreneurs – sustaining working capital while managing the flow of cash. Though it may seem counterintuitive, challenging economic times like these can actually be a good time for small business if you have the right financial plan in place. Consider these 10 tips for managing your business finances through tough times.
- For starters, re-assesses your business budget. Managing costs is essential to any business operation, especially small businesses if they have been operating on credit. A well thought-out budget could be your most valuable business tool. If you are not already using a profit and loss projection forecast I suggest that you do, making both short and long term forecasts.
- Understand your cash flow. Cash flow problems can kill businesses that might otherwise survive. According to a recent study reported by SCORE, Jesse Hagan of the U.S. Bank informs us that 82 percent of business failures are caused by poor cash-flow management skills. Calculating cash flow is one of the most important tasks of the business owner. Revenue and expenses are rarely constant in a business and cash requirements need to be planned for shortfalls, seasonal factors or one-time large payments.
- Improve your systems for billing and collections. Use good accounting software to help you manage your account receivables and payables. There are some effective, inexpensive programs on the market. Check out Microsoft Office Accounting Express, it’s FREE!
- Review your monthly financial statements! The three basic statements that should be prepared and reviewed every month are the balance sheet, the profit and loss statement and the cash flow statement. Keep meticulous accounts of money going out and money coming in, and make no major purchasing decisions until you've checked your budget and your statements. (Importantly, you will need this data if you are considering getting a loan to help with your cash flow.)
- Improve your financial stability by knowing the difference between cash flow, working capital and profit.
- Consider revising and implementing Payment Policies. Ask for up front payments and introduce plans that offer discounts for full payment or pre-payment. This will enable you to generate cash into your business and handle your finances better. Add late payment charges or fees where possible.
- Be practical! Now is a good time to cut costs strategically and reduce your overhead. Look at every single expense and ask yourself, “If I reduce this, will I influence my likelihood to remain in business or increase the strain and stress to maintain my business?" If you set your expectations at a modified level, you'll have a far greater chance of staying within budget and thus succeeding. Be mindful not to cut areas that will reduce the quality of your service.
- Practice anticipation skills. Change represents an opportunity for your business and it must be anticipated and prepared for. Personal key elements for crisis management resilience are sensibility and adaptability. Are you learning to recognize opportunistic cues from the business environment? Do you know what the business climate is in your community? Do you have a contingency plan—just in case?
- Pay yourself first from your profits! What can your business afford to pay you? Figure that salary level into the business budget so that your projections for revenue would allow you to get that salary.
- Report your earnings and pay your taxes! When you are self-employed, the entire burden for paying employment taxes and prepaying estimated income tax liability is left to you. That’s why you need to pay estimated taxes in quarterly installments to the U.S. Treasury; otherwise, you may be subject to underpayment penalties. The Social Security tax rate for 2008 is 15.3 percent on self-employment income up to $102,000. Add the tax line to your quarterly forecast and then make sure you put aside those tax dollars.
Clearly, financial management encompasses a number of crucial areas of your business. Take the time to set up your budget right. Integrate your budget into your business and marketing plans. It will make a significant difference in your stress levels and in the bottom line for your business.
Wishing you Inspired Business Success!
SCORE - Counselors to America's Small Business http://www.score.org/business_toolbox.html
MICROSOFT OFFICE - Accounting Express
About Vidya McNeill:
Vidya McNeill, MA, happily supports professionals who are dedicated to their personal calling, fair and ethical performance, social responsibility, holistic awareness, and spiritual development. She believes that conscious business is the most immediate vehicle for possibilities advancing integral transformative consciousness in a global marketplace! To learn more about Vidya and all that she has to offer, please visit her profile in the PPS Mentoring Services page on our website.