Your success as an entrepreneur comes down to whether or not you can pay your bills and still turn a profit. Seems obvious, right? It is, but achieving a healthy balance between monetary intake and output is an art form that confounds many entrepreneurs. According to entrepreneurial guru Ty Freyvogel, your ability to manage your cash flow will either make you or break you.
Eight cash flow secrets of entrepreneurs
By Ty Freyvogel
I have seen otherwise successful entrepreneurs crumble under the stress of poorly managed cash flow. Likewise, I have watched colleagues flourish under a well-structured, well-maintained accounting system.
Fortunately, it's quite possible to stay on top of the money coming into and going out of your company. Read on for some tips and insights that have led to my own businesses' successful cash flow.
1. Assume that your estimates are wrong—and save for a rainy day
No matter how carefully you plan for all potential cash-related scenarios, you will not be able to accurately predict the "weather" of your operating environment. At any moment, a storm front or even an unexpected sunny day could appear out of the blue. Don't get me wrong, it's a good idea to make rough estimates for your cash flow; just be sure to give yourself a healthy margin for error, because you must always expect the unexpected. In other words, keep a nice cushion of "extra" money in your account for those surprise bills. I know that entrepreneurship is based on taking risks, but where cash flow is concerned, err on the side of conservatism. Remember that cash is king. No matter how much we dislike it, our cash flow determines what we are able to do with our business.
2. Don't underestimate the value of a good customer
As the owner of your business, you have the choice to run it as you see fit. But no matter how successful and powerful you become, remember that your customers are the reason you exist. So be good to them. Some of my oldest customers are still my best customers. One company can spend millions on your services during the years. If you're a consumer company, even one person can be worth thousands of dollars over the span of your business relationship. For this reason, you must not let success change your mission to give every client and customer the royal treatment. They are, after all, responsible for the incoming cash you will use to pay your business's rent, taxes, and other fees. They are the face of your cash flow.
3. Keep tabs on your expenses
Don't rely on your memory alone to know when to pay your bills, order new supplies, or bill your clients. Even if you run a very small business, you will never be able to pay everything on time if you don't have some system in place to help you keep track of it all. For this reason, it is imperative to appoint some method to help you keep your bills and their due dates separate. Your system can be as simple as keeping a notebook documenting when to write checks and when to deposit them. Or you can utilize a computerized system like QuickBooks to help you keep track of everything. Being well organized will ensure that you're supplies are always in stock, your power never goes out, and your employees get paid. Take my advice on this one. It is a lesson you definitely do not want to learn the hard way. When putting your annual projections together, think carefully about non-recurring bills, those payables such as insurance premiums, tax estimates, or payments that have a tendency to sneak up on you and say "Gotcha," sometimes when you least expect it.
4. Don't extend credit to just anyone
You will almost certainly have to offer credit to at least some customers, if not all of them. (It depends on the type of goods and services you offer, of course!) But be extremely careful when determining who gets the benefit of your credit and who goes on his merry way. Read credit applications thoroughly and check all references. Never raise the credit limit of a risky customer, and don't hesitate to lower it if you have to. You might even consider consulting with a good creditors' rights law firm to help you craft a smart credit policy that makes sense for your company and increases the likelihood you'll get paid—at least most of the time.
5. Be firm but kind with clients
It is important to run your business in a manner that tolerates a certain amount of leniency with clients, but don't let them walk all over you either! If you establish yourself as a complete pushover, even clients with the best intentions will take advantage of you. It is also important not to run your company with an iron fist. You want to find a happy medium that will keep you in business and keep your clients happy. That being said, don't be afraid to politely call a customer who hasn't paid a bill and remind him or her that it is overdue. They understand that you have provided a service and it requires a payment. You can preserve your client relationship and get your money by treating the client with integrity.
6. Break even
You have to at least break even each month in order to survive. Ideally, an entrepreneur wants to make a profit, but if you are facing hard times, your biggest goal will be to just break even—and then get back on track. If you have done all the preliminary steps to opening your own business, then you probably already know the bottom line numbers regarding your expenses versus the amount you hope to bring in. For obvious reasons, you want your incoming cash to be significantly higher than your outgoing. So engrave your break-even number in your mind or sticky-note it to the front of your computer, and see that you surpass that number each month. Simple. Here's a quick tip: If you are having problems breaking even one month tell your vendors, don't keep them in the dark. Make a deal with them to make partial payments until your receivables catch up or that you can arrange a loan for working capital. They will appreciate you in the long run. No one likes surprises, especially your bank.
7. Be honest with the man
Do not, I repeat, do not try to cheat the government. Some very clever people have filtered out money from their business that they were able to keep out of the government's grasp …for a while. You may get away with hiding money, under-reporting income, fudging your write-offs and other methods of cheating, but you probably will not. Uncle Sam has gone to great lengths to set up systems that keep this from happening easily. The IRS is going to get its "fair" share. You may resent paying it—most entrepreneurs do—but follow the rules and at least you'll get to feel resentful outside of a prison cell. I've always paid the tax man first.
Why, taxes are good. (Really!) Many businesses try to have a very small profit at the end of the year so they don't have to pay huge amounts in taxes on it. This can negatively affect cash flow if you keep your business account so low that you don't have enough of a pad there to pay an unexpected bill. I suggest that rather than taking tax avoidance to extremes, you get out there and try to make more money. If you think about them in the right way, you won't view taxes as such a bad thing. Uncle Sam is going to get his cut one way or the other, so you may as well assume that paying lots of taxes means that you are doing very well.
8. Keep away from credit cards if possible
Credit cards are necessary, but that doesn't mean that you should aggressively run up a mountain of debt. Businesses shut down because of factors like credit card debt (In my opinion, this is the most expensive debt you can incur!), so swipe with caution if you have to swipe at all. Don't max them out, by any means. If you find that you have to max out a credit card your business may already be in trouble and it is time to seek alternate funding. Cut costs somewhere, or (best of all) figure out a way to boost your profits.
Don't worry if managing your cash flow seems very difficult and even overwhelming at first. Cash flow is very complicated and can take some getting used to. It is a lot like learning to pay your own bills after college graduation––a daunting task at first, but certainly not an unattainable goal.
After a few months, you will embrace your monthly monetary obligations and may even find a sense of comfort in the ebb and flow of money. Like the tides and the seasons, cash flow has a natural "rhythm" that keeps you grounded and helps you make sense of your place in the business world. Before you know it, you will be able to use your cash flow as a gauge of your ability to take risks—and that knowledge will help you make the kinds of smart decisions that help your company grow and flourish. Remember, when your outgoing exceeds your incoming, your upkeep is your downfall.
Ty Freyvogel is the founder of Freyvogel Communications and is the author of "It's Not Your Smarts, It's Your Schmooze" and "Seize the Century!," as well as an advice guru on his new website, MakingSenseofYourBusiness.com.