By Kenneth Surbrugg, Director of the Center for Entrepreneurship at Missouri Southern State University
Your firm’s financial health and profitability depend upon your ability to utilize your financial information to make good business decisions. Benjamin Franklin provided good advice when he said, “Diligence is the mother of good luck.” In order to have financial success in business, you need to be diligent in maintaining and improving your company’s financial situation.
What this means is setting aside time in your schedule to review and analyze your past performance in order to budget and project for the future. What good is it to have $500,000 in accounts receivable if you never attempt to collect? How helpful are financial reports if you never take the time to sit down and analyze them? What good is setting goals if you have not considered how those goals will be funded and then met?
Consider using some of these financial management planning techniques.
- Cash is king; budget carefully. Develop a cash flow budget that will help you anticipate when you will have cash inflows of revenue and cash outflows of expenses. This will help identify times of cash shortfalls. Seasonal sale fluctuations are common in many industries. You want to make certain that you will have adequate cash to cover your expenses. Revise your budget when necessary and pay attention to historical, and industry, trends.
- Manage your expenses. Since the cost of products and services in the marketplace will fluctuate, make certain that you are not overpaying. Examine quantity discounts and better payment terms. Examine operating expenses for possible cost reductions. How can you reduce your rent, transportation, and other operating expenses? Remember, you are running your business to make a profit. If you cannot control your expenses, you will not be profitable.
- Barter if possible. Many companies barter services with one another. You may exchange services or products with another company and not use cash in the transaction. This method can help save money. There are several businesses that will consider bartering for goods and services to save cash.
- Monitor your inventory. Carefully analyze inventory turnover to decide which products are selling well and which ones are not selling. Do not tie up your cash in inventory that is not going to meet the needs of your customers and help you to be profitable. Consider how you can improve your supply chain and maintain good relationships with suppliers.
- Collect accounts receivables quickly. Are your accounts receivables current or are you in a pattern of not being paid on time for services you perform and goods you sell? Do you email invoices and follow-up on overdue accounts? The longer you wait to collect, the less likely you will be paid.
- Examine your financial statements on a regular basis. Review your income statements, balance sheets, and cash flow statements. Is your business profitable? Are your expenses out of control? Are you adding value to your company? Do you compare your company financials with other similar companies in your industry?
There are many reasons that businesses struggle with cash flow. Maybe you have a major account that pays in 90 days and your business operates on a 30-day cycle. Maybe there are times that the business requires more cash than planned. Or maybe your business has to operate with lower margins due to the industry structure and customer expectations. If that is the case, what can you do? You can start by examining your industry and comparing your performance to the industry. You can also monitor your company’s performance to see cash inflows and outflows.
“There are no secrets to success. It is the result of preparation, hard work, and learning from failure.” – Colin Powell.