Statistics show that in a good economy, approximately one third of all small businesses do not survive their first year of business. Approximately two-thirds do not survive year three. The primary reason a business fails is poor financial management, which in many cases is preventable.
So how can a small business survive in a bad economy? Larry Rice, CPA, Director of Strategic Consulting of Rodman & Rodman, P.C., Certified Public Accountants and business strategists catering to small and medium sized companies throughout New England, outlines critical cash flow tips for small business owners to help them weather a bad economy and beyond.
Create a cash flow projection or plan. Every small business should measure projected cash flow one year forward. That projection should be updated on a quarterly basis. A good cash flow projection starts with a good sales projection. Use historical data and be sure to consider any changes in your environment such as competition, economic change, etc. Once you have that sales projection, then it is a matter of translating those sales into the time frames that you get paid for those sales. When you place the payment for those expenses along side the receipt of revenues, you’ve created a cash flow projection.
Plan appropriately for capital expenditures. Due to an aversion of debt, many business owners pay cash for significant corporate assets. This can lead to a cash flow disaster. A good rule of thumb is that all long term assets should be financed over the expected life of those assets. If you are going to buy a machine that will last 10 years, you should seek to finance it over those 10 years. The idea is to match the outflows (the payment for the assets) to the time you expect to generate inflows (sales) from the use of that asset.
Better your credit management. Eager to make any sales, some owners do not have strong credit policies. The worst of all cash flow problems is to expend all the resources to make a product or provide a service, and then not get paid for it. Small business can not be too eager to have just any customers; they need to have the right customers. Go after the customers you want, not the customers who will waste your energy as you chase them to get paid.
Manage suppliers. Small business often pays its bills at designated times, which often are too early. Sometimes this is for convenience but can be dangerous to cash flow. Bills should be
paid timely to maintain good customer relations, but as close to the due date as possible. Seek opportunities for taking the better discounts for prompt payment from suppliers.
Manage inventory. Sometimes owners do not want to rid themselves of stale inventory at a discount, hoping that some customer will appear to pay full price. Sometimes the best course is to get rid of the inventory and use the cash for other more practical purposes.
Maintain a good relationship with a bank/lending officer. Not all credit decisions are objective. By maintaining positive communications, sometimes credit which might not be available can be secured when you maintain an open dialogue
According to Rice, “The most important financial statement is not the Balance Sheet or Profit and Loss; it is the Cash Flow Statement. Only the cash flow statement tells you how much cash your business is generating from operations. A very profitable company can still fail if the cash flow isn’t there to sustain that profit. Bottom line: more businesses fail because of poor cash flow than poor profit. Good cash flow planning is the key to small business success in any economy.”
Rodman & Rodman, P.C.
Founded in 1961, Rodman & Rodman, P.C. provides accounting, tax and business services to small and medium-sized companies throughout New England. With a focus on strategic planning, Rodman & Rodman goes beyond traditional accounting services and takes a proactive approach when serving clients to increase, preserve and sustain clients’ financial net worth.
From business valuations, taxation, audits, fraud detection and prevention services and succession planning to a variety of accounting IT services including software selection, implementation and training, the team at Rodman & Rodman serves as comprehensive advisors to clients. For individual clients, the company offers personal advisory services such as planning for real estate transactions, obtaining financing, estate planning and retirement planning as well as planning for college education. Rodman & Rodman Certified Public Accountants are located at 3 Newton Executive Park in Newton, Mass. For more information, visit their website at www.rodmancpa.com or contact Jen Reading at (617) 965-5959.