When you start your business, cash is always tight. However, as the business grows and fixed costs remain steady, there are often periods when more cash is available for either the owner's or the business’s use. Often, the owners increase the amount they withdraw, and there is still enough cash left over. However, as time progresses, the business may either continue to grow or start to decline. While the impact on cash flow in a declining business is apparent, it often surprises owners that cash flow also tends to decrease temporarily even in a growing business. Here are some reasons why managing cash flow can become challenging:
Outsourcing tasks like accounting, marketing, and IT.
Hiring additional employees or contractors, which includes their salaries and related costs like additional software user fees, computers, desk supplies, and new systems.
Increasing owner pay, draws, and/or dividends without planning for future needs.
Incurring higher upfront costs that will be reimbursed or covered by future sales, such as inventory, travel, or supply purchases.
Investing in more sophisticated (and expensive) software, equipment, and tools.
Experiencing delays in payments from customers.
Cash flow will never be completely steady or predictable, but there are strategies you can employ to either mitigate stress or minimize fluctuations:
First, adjust your expectations. It takes time to build a profitable business that compensates you adequately for all your efforts. We recommend a dual approach to withdrawing funds: a regular salary and a quarterly bonus. We advocate for the Profit First cash flow system, which encourages setting aside funds for future needs and avoiding dipping into other reserved money to enhance profitability. Learn more about Profit First here!
Second, prioritize billing and collecting from your customers. It can be time-consuming and challenging, especially if you are the main sales contact. As soon as possible, delegate invoicing and follow-ups to someone else. This strategy allows you to maintain your client relationships while ensuring consistent and timely cash inflows. Delaying this process can quickly lead to financial obligations piling up.
Third, plan your financial future. It's challenging to forecast cash flow for the next 3-5 years due to the many variables in a small business. However, it's advisable to conservatively project your cash flow for the next 3-6 months. Use historical data to predict all cash inflows and outflows, including the costs of new hires (both one-time and ongoing). Remember to account for items that don’t directly appear on your Profit & Loss statement, like inventory, owner draws or dividends, equipment purchases, and loan payments.
Fourth, outsource effectively. Whether to another employee or an external firm, letting go can be difficult and may incur costs, but if done correctly, it will free up your time to focus on higher-value activities that can increase your cash flow.
Fifth (and this arguably should be the first step!), ensure your books are in order. Accurate bookkeeping is crucial to understanding your business’s financial health.
Need help with planning? Reach out to Larson SMB Consulting. Need help with your books? Contact ElitePro Bookkeeping.
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