Money-in and money-out. Pretty straightforward right?
Yet, this flow of cash is one of the leading causes of small business failure, if you get it wrong.
Especially during the holiday season, money-out can get pretty hefty for small business owners. The holidays take a lot of preparation, and if there’s an unexpected dip in return, what goes out may not come back in full. Neglected cash flow can be overwhelming, if not devastating. For this reason, business owners need to be proactive and vigilant when it comes to tracking their expenses and earnings.
Of course, outflows peak during the holidays. With business expenses inflated by holiday promotional investments, expanded working hours, and more stock, it’s no secret that finances will get a bit messy during this time of the year. Q4 may be the wildest time for small business finances, but that doesn’t mean you can’t prepare.
Despite the terminology, cash flow management isn’t as difficult as it sounds. It’s the falling off track that makes the process tricky. But with these holiday cash flow tips, your small business won’t have to worry about that.
Haven’t you always wanted to see into the future? Well, checking your books, local trends and events, and budgeting accordingly are your ways to do so.
It’s difficult for any business to get ahead without first looking ahead. Forecasting isn’t some cheesy, by-the-book superstition. It’s important to understand your business’ potential for holiday earnings and how to get them before acting in terms of staffing and stocking.
Without properly forecasting, you risk over or under performing. You need to know what you can expect to earn, how much to stock and staff, and how much you can spend on marketing.
In terms of stock, you could be left with inventory you can’t sell, or else sell out of high-demand inventory that can’t be restocked in time. Additionally, your team may be under-supported, leaving customers neglected and irritable, or overcrowded and eating chunks out of payroll.
Forecasting is essential to a healthy cash flow. And while it’s likely that business owners are forecasting, how can they be sure they’re doing it effectively before it’s too late?
Look back. Your cash flow relies on data. If your business has history, you’re not helping yourself by ignoring it. The following business statements can help businesses track and plan accordingly for the holidays.
An operating cash flow statement contains the amount of cash a business generates in a certain amount of time. It’s useful for breaking down cash flow from operations and current liabilities. An operating cash flow ratio can be determined by dividing these two:
Operating Cash Flow Ratio = Cash flows from operations / Current liabilities
This ratio should be at least 1:0 in order for your operations to be effective. Otherwise, you may not be able to pay your bills.
A business’ balance sheet contains your assets, liabilities, and shareholders’ equity. This lays out all expenses and functions. Of course money-in isn’t always money earned. A balance sheet organizes what is owed, owned, and the amount invested by shareholders:
Owners equity = Liabilities – Assets
An income statement is also important in connection to the cash flow statement and balance sheet.
If the sound of these documents terrify you, make sure you have a solid relationship with your accountant or bookkeeper. It’s important to keep communication flowing so that your cash flow won’t be stalled.
And of course, they’re a lot more easily managed when digitized. Accounting technology, like Quickbooks, can save you the paperwork and time.
Free cash flow measures profitability minus the costs of operations and maintaining assets.
Cash flow from operations focus solely on the core of a business’ activity. It differs from net income because it tracks the money going in and out of a company from day-to-day.
Net income measures a company’s profit over a period of time. It’s used as a factor to calculate cash flow from operations.
While it’s not essential that business owners are masters of these metrics, they’re helpful for determining and organizing what’s entering and leaving. Metrics are the keys to action.
When tracking these metrics, it’s important to keep personal finances out of your business finances. Have a business credit card and bank account, and don’t dip into it for personal spending. For reporting reasons, you don’t want your business expenses showing up in a report next to your lunch plans.
This is a tricky procedure to say the least. It takes a savvy business owner to determine what qualifies as a work or personal expense in the first place. It’s on you to make sure you’re not mixing up cards, especially since the accounting or bookkeeping staff you employ to track expenses might be on vacation, Overlapping business and personal expenses means more confusion thrown into the already stormy holiday mix. And trust me, it does not go well with eggnog.
But, with some patience, great tools, and maybe a bit of advice, it’ll all be worth it.
Be proactive with invoices. While often businesses are being paid in retrospect, it’s important to stay vigilant with past-due invoices. Hopefully you have some track record with your customers and can identify slow payers.
If that’s not enough, Veem’s Paid Now program expedites the process of getting paid by letting businesses settle invoices instantly. If a business customer has an outstanding payment, you can get paid instantly.
‘Tis the season for gift-giving and discounts. Use this. Encourage pre-sales, gift cards, and subscriptions that can give you a bit of a head start on balancing your books. But remember to record them appropriately. The holidays will end eventually and when that happens, these numbers will come back around like bad karma.
It’s important to have a cash flow formula year-round. But operating costs don’t stop for the holidays. Then, add on the fees for seasonal promotions and advertising, plus staffing and onboarding costs. Wait…what are all these charges?
Don’t let your cash flow freeze up this holiday season.
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