If it seems you work all the time, but still juggle to pay bills, here are some helpful questions to ask yourself. Several dynamics contribute to your cash flow. If your business is struggling with this, take a look at these factors.
- Do customers owe you money? (These are your Accounts Receivable.) If so, how long have they owed it to you? You’ll find the number on your Balance Sheet, listed with the Assets. (It’s an asset because it’s money you should have, even though you don’t yet.)
Collecting past due invoices is probably the least fun activity for a business owner and, in a perfect world, you shouldn’t even have to do it. You provided the goods or services, and those who don’t pay you are taking unfair advantage of you. Your choices are to bite the bullet, make the collection calls, possibly offer incentives for paying NOW to avoid further collection efforts, whatever other action you decide to take – OR- write it off as bad debt. That’s clearly not the preferred option. But your goal is to reduce your accounts receivable, hopefully by actually getting paid.
To make the incidence of the problem less likely in the future, consider using the online payment collection ability built into QuickBooks Online and other accounting software. When customers or vendors are sent an electronic invoice with a “Click to pay here” type option, you make it easy for them to pay now, right when they’re looking at it, with a credit or debit card. Don’t make them cut a check, stuff an envelope, pull out a stamp, and make a side trip to a mailbox. They might not get around to that.
- When was the last time you took a hard look at your costs?
At home, we continue to pay for subscriptions to magazines we don’t have time to read and memberships to gyms we don’t make time to work out in. In the same way, you may not have analyzed your business expenses in a while, and there could be some there you can reduce or eliminate. Your Income Statement (a/k/a Profit and Loss, or P&L) lists those expenses. Look at each one critically, and see where you may be over-spending.
- Are you charging appropriately for your products or services?
You probably want your prices to be competitive, but are they still in line with the market now, even if they were 5 years ago? Or did you start your business selling a bit below the market because you just wanted customers, and that’s where your prices stayed? If you now have a loyal customer base because you’re very good at what you do, are you still stuck thinking you need to compete on price?
Benchmarking for your industry or business can help reveal where you might be selling yourself short. If you’re a residential construction contractor, for example, your gross profit should be higher than a business owner in a lower risk industry. Are you leaving money on the table? Are you charging for change orders — and every time? You should be. You also need to analyze individual segments of your business if you have them, because some may be more profitable than others, so looking at totals won’t tell the story.
- Do you need to increase your sales? (It’s possible you don’t, if you make any necessary adjustments in the first three items first.)
If it turns out you do really need more business, you’re in the realm of marketing, and that’s unfortunately not my area of expertise, so you likely know more about that than I do. If so, how about if YOU write a blog post about how to increase sales, and point me to it!
In the meantime, make sure you’re getting paid, you’re being paid what you’re worth, and you’re not spending unnecessarily. It’s easy to say, harder to do, but critical to your long-term success.
The Statement of Cash Flows is a valuable financial report that you may not have used in the past. Divided into the three categories of operating activities, investing activities, and financing activities, it covers a date range, and answers the question: where did my money come from and where did it go? If it’s a report that’s available to you in the bookkeeping software you use, check it out.
According to the Small Business Association:
More than 51% of all businesses that file for bankruptcy protection in the U.S.
are profitable on their Income Statement.
Be sure to consult your Statement of Cash Flows along with your Balance Sheet and Income Statement (P&L) for a complete picture of the financial health of your business.