Know the cash flow to manage a small business
Knowing the cash flow to run a small business is the most important, especially when it is just beginning. One of the most important things you can do for your business is to do a cash flow analysis in your finances. So … Why is cash flow analysis so important? Cash flow analysis simply means observing the inflow of money and the flow of money from your company. By having a detailed analysis of all your financial transactions, you will know exactly how much money should be in the bank.
If you do not track your cash flow, you run the risk of being taken advantage of. Employees could steal supplies and you would not know. The prices of the merchandise could increase without your knowledge and this would really affect your budget. For example, if your employee is paid 20% more than the industry average, you may end up unbalancing your company. While this is a generous action, it is not sustainable when you are just starting a business. This discrepancy undoubtedly ends up hurting your cash flow and your ability to successfully finance your small business.
Common mistakes made by small business owners
- When small business owners do not feel they have the experience to manage their finances, they let their accountant do everything. This blind trust could generate problems of fraud or theft. If your small business finances are handled by an accountant, re-verify everything they do. It is not necessary to be a tax guru to see if something does not look good.
- When small business owners do not keep physical copies and records. You must keep copies of everything in a safe place for future reference and insurance. If you do not keep copies of your tax returns, you may ignore the money you owe. This is the reason why the state tax collector can impose a levy on your business that could seriously damage your chances of obtaining a loan.
- When small business owners try to approach payroll by themselves. Payroll will be the biggest expense of any business. Payroll also carries a high potential for tax errors. Investing in someone to manage the payroll will be worth it.
- When small business owners extend credit to customers. If you give credit to your customers, you run the risk of not paying what they owe. Also, providing a service or product before payment hurts your cash flow because you rely on that payment to manage your business. In case it is a small company of a person, you can apply for the loans without a salary receipt, which will help you to have fresh capital.
- When the owners of small businesses assume the automatic transformation of the inventory in cash. When you buy a new machine or order a new merchandise, it does not instantly turn into profits. Many small business owners mistakenly overestimate how soon the products will be sold or will soon see an increase in sales.
- When small business owners, especially new immigrants, incorrectly report their taxes. Because you do not want to pay a lot in taxes, you may be tempted to report fewer profits or report excess losses. This is a bad idea because it will affect your chances of obtaining external financing and could cause you problems with the state tax collector. It is better to work with a tax specialist to minimize your tax liability.
Tips to manage cash flow
Some tips that could help you better manage your company’s cash flow can be cited as follows:
- Begin with the creation of a profit and loss statement. Simply verify the status of your company’s account. In a spreadsheet or with your accountant, document all financial transactions, including rents, utilities, payroll, supplies, interest on loans/credits, insurance and sales. Keep copies of all these invoices.
- Keep all your documentation organized, such as invoices, tax returns, receipts, etc. The first thing the lender’s request is the documentation. It often happens that many small business owners do not know their monthly sales average and would have to look for it.
- Always save some of your winnings. Do not reinvest everything, because you will need emergency funds. We recommend reservations that can support all your expenses for at least six months. You may need more protection if your commercial industry depends on the season.
- Companies that provide accounting and auditing services are a great ally when a cash flow analysis is required. These companies aim to help small business owners make better financial decisions and even advise them to get the right loans to help their business prosper.