Life Area: Professional
Maintaining cash flow positive is something that many small businesses struggle with. After all, it only takes one or two late net 90 clients and you may find yourself among the 90 percent of small businesses who fail every year due to cash flow problems.
Setting goals for cash flow management can help make sure you have a profitable business and enough cash to offset your monthly expenses. Here are five cash flow goals that every small business should aim for:
5 Small Business Cash Flow Goals
1) Pay attention to margins
By “margins”, I mean both gross margin and net profit. Gross profits are what are left over once you subtract the cost of goods sold. Margins vary by industry, but there are some things you can do to ensure yours are healthy. That includes controlling the cost of materials, labor, and setting the right price point.
Don’t forget your net profit margins (before taxes are paid). This is what’s left from your gross margins after your expenses have been paid. If your net margins are below 10 percent, you should reassess all the above. A good goal is a minimum 10-20 percent. Grocery stores run 3-4%, home builders 8-10%, and suppliers can run as much as 25-50%, so be sure to compare yours to the relevance of your industry.
2) Pay yourself a salary
It’s not uncommon for new business owners to work uncompensated. However, many continue doing so even when they start turning a profit. It’s believed that as many as 90 percent of small business owners underpay themselves.
While it may seem like the thrifty thing to do, underpaying yourself can jeopardize your personal finances. This can leave you high and dry if your business ever runs into cash flow issues. It also suggests that you aren’t confident in the profitability of your business.
3) Have finances in reserve
We know we’re supposed to have enough cash set aside to cover our personal cost of living for six months. But business owners also need to have cash in reserves or working capital. At a minimum, plan on having enough cash to cover at least 2-4 weeks of business expenses. You’ll need even more if your client invoice terms are net 30 or higher. However, it’s always a good idea to aim for a cushion of 90 days to cover any emergencies like illness, natural disasters, market fluctuations, etc.
4) Avoid debt
Debt erodes cash flow, period. If you do have debt, try to pay it off as quickly as possible. Lines of credit are a good option for doing this. A line of credit is a given amount of money you can borrow when you need it, and repay back when you don’t. It is different from a loan because you don’t have to use it. But you can use it as a fallback option if you have unexpected cash flow issues.
5) Save for growth
Business loans, hard money lenders and investors are an obvious option for helping you expand or grow. But smaller businesses should try to self-fund whenever possible. Operating with cash and no debt will put your business in a much stronger financial position. Especially if your long-term plans include future third-party investment or the sale of your business.
Your Action Step
Be realistic about your goals. Aiming for super high margins, an unrealistic salary, or endless cash reserves can be detrimental to your business. Think about each of the above steps and prioritize each based on what’s realistic and achievable for your industry, fiscal state, and wider business goals. Start by revisiting your business plan, talking to your accountant, and then go from there. Many businesses opt for a business coach to guide them. If you think I would be someone who you would want to explore a business coaching relationship with, check out my business coaching page on my website and give me a call.
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