First: Follow the trail of the money if you want to improve your cash flow
You cannot be successful in business for the long term if you omit to systematically keep track of your income and expenses as well as keep on top of who owes your money as well as vendor you owe money to. You should keep your shoes in shoe boxes, not your business records. So, make sure you have a suitable system in place to enable you to stay on top of your business progress and assess where you are at any given time.
This does not mean you have to invest lots of money into a big expensive computer system or use complicated accounting software. There are many low cost accounting software packages that allow you to effectively track every transaction in your business in an organized manor. It is imperative that you get a system in place though. Without it, you will never know where you are or what you should be doing to correct immanent financial problems before they get too far out of control.
Second: So you owe tax – Well, don’t worry, be happy!
That’s right, owing some taxes means you must be making a profit, right? Well, isn’t that the objective of why you went into business. You can’t have it both ways. You can’t make a profit but then not want to owe taxes. Many business owners seem elated when they find out they don’t owe any taxes at the end of the year. Ah, well, the problem with that scenario is that if you don’t have to pay tax, it stands to reason that you can’t be making a profit. Well then, if you are not making a profit, then why are you investing all your time into the business?
Another fallacy business owners make is to base their decisions on business ventures on the goals of reducing their business profitability so their tax liability will be minimized. Does that really make any sense? Hardly. Wouldn’t it be far better to make a high profit and pay tax on it and still be left with money in your pocket?
Think of it this way. For the small business, what the government considers to be profit is actually you, the owner’s paycheck. That is because the profit is the residual income that’s left after paying all business expenses and this needs to go to the owner(s) as compensation for their time and effort devoted to the business. So, does it make any sense to purposely try to lessen your take home pay? You certainly would not tolerate this if you were an employee working for a paycheck and the boss was doing things to purposely lower your compensation would you?
Obviously, everyone likes to make money, but no one likes to pay taxes. Well, you need to adjust your perspective and adopt this attitude. It is far better to strive to make as high a profit as possible and then, use all the legal strategies and means available to you under the law to minimize the tax you have to pay on the profit.
If your business is making money, don’t go out and start spending it all without first setting aside some of those profits in an account you will not touch. Remember, unlike an employee where the employer is taking responsibility to withhold and remit taxes from a paycheck, as a business owner, this is your own responsibility now. If you get to the end of the year, discover you owe more taxes than you have money in the bank to pay, not only will you still ultimately end up paying those taxes, but now, you will be needlessly throwing away even more money in the form of interest and penalties.
Third: Do what you can to make sure you get paid on time
So, you provided a product and service. You lived up to your end of the bargain, now, make sure your customer lives up to their end of the bargain and compensates you for that sale. Keep on top of your accounts receivable and make sure your customers are paying you on time. It makes no sense to sell a product or service if you are not going to get paid for it. Don’t extend credit lines more than you feel is necessary. Stay on top of who owes you money. Remember, unless there is a legitimate reason the customer is disputing the invoice, you have the right to get paid.
Look, if someone went into a store, took a product off the shelf and walked out of the store without paying for it, that’s a crime. We call it shoplifting. Well, if someone takes your product or service and then does not pay you for it, obviously giving you no information of their intention not to pay, then, isn’t that also akin to stealing? Sometimes, there are legitimate and unforeseen financial hardships that just plain get in the way of the customer’s best intention to want to pay you. In those situations, if you value and like the customer, then by all means, do what you can to accommodate them. But, on the other hand, if you feel like you have just been taken advantage of and the customer does have the wherewithal to pay you but just chooses not to, don’t make it easy on them to get away with this unethical behavior. The fact is, that same customer has probably stuck others just like you. In those cases, know what your legal options are and pursue them.
Fourth: Know your breakeven point
The breakeven point is that pivotal juncture where your income equals your expenses. Once your income exceeds that point, you start to make a profit. Obviously, that’s where you want to be operating your business.
Knowing that breakeven point is vital to your business’s success. At all times, you need to know how much it is costing you to produce the product or services of your business. Again, referring back to the beginning, this is exactly why you need a good bookkeeping system in place to provide you with this kind of up-to-date accurate information when you need it. Your system needs to be able to show you how many total sales you are making, their value and the cost to generate those sales. It is only then that you will be able to find out what level of sales you need to achieve to cover your expenses and how many customers you need to sell to in order to meet those targets.
If you can’t reach the required income level, then your only option is to look for ways to reduce your costs. However, it is far better and more effective to focus on growing your sales. There is a lot more potential for limitless growth versus focusing too heavily on just cutting costs, which tends to run up against limits quickly.
Understanding the concept of breakeven is critical to your business. This concept needs to be foremost in your mind in making all decisions about your marketing, new product or service launches, expansions and staffing.
Five: Take the time to prepare budgets
Yeah, we know, most people are just too resistant to taking the time to do this. But, a budget can help you stay on track and keep you focused. Plus, it can highlight potential unanticipated cost overruns early on so that you can react appropriately to focus on that area of your business. Operating your business without a budget is like flying blind. Yeah, you may reach your destination, or, on the other hand, you may crash!