cash flow

5 Traps to Avoid When Growing Your Business Rapidly

Growing your business, especially growing rapidly, can be a really great accomplishment, but there are dangers when growing too quickly. Here are several traps to avoid to ensure successful growth:

Cash flow: Quite often, a small business will have cash flow issues when growing too rapidly. This is due to a delay of getting paid, while expenses need to be paid for upfront or before getting paid. There are 3 solutions that can help depending upon your situation. The first is to see if you can obtain terms with your suppliers to delay expenditures, second is to obtain a line of credit to support your receivables, and third, which tends to be the hardest, is to build up a cash cushion first.

Finances: As you grow your business, the financial aspect becomes even more crucial to your success. This entails a focus on investing in more robust accounting software, accounting staff and/or accounting services, streamlined processes and procedures, and internal controls, to name a few.

Employees and management structure: Unless you enjoy working 24/7, you need capable managers to manage your employees (you have been hiring more employees, right?). It is easier to have a few people reporting directly to you then several dozen. Also, make sure to acknowledge and reward the loyal employees that helped you to obtain your success.

Personal time and wellness: It is very easy to put in excessive hours to handle the massive growth of your business. There will be times when you need to work extra, but if this becomes the norm then it is easy for your personal relationships to suffer, along with a decline of healthy habits.

Infrastructure and organization: This applies not only to the physical nature of your business, but especially your operations. Have you outgrown the physical space that you occupy? Are you using equipment, technology, or IT that is not keeping up? Are your vendors and advisors able to handle the growth of your business? What about marketing and marketing staff? These are all areas to consider; otherwise, they will act as barriers to your growth.

Growth needs to be profitable, stable, and smart; otherwise, your results can easily go in the opposite direction that you intended. Think long-term, strategically, and surround yourself with the appropriate advisors to help you along your journey.

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Is Cash Flow Going in the Wrong Direction?

Cash flow. It’s what keeps every business alive just like the blood flowing through your veins. The irony is that although it is extremely important, it is not managed properly by many businesses, even the successful ones. Here are reasons for common cash flow issues and how to fix them:

Problem: delays with receiving payments: Common reasons for not get paid timely include: slow invoicing/billing procedures, customers on long payment terms, not accepting electronic payments, and customers with cash flow issues.

Solutions: Do not delay with invoicing or processing payments from customers, especially as soon as a service has been rendered. When possible, shorten payment terms to get paid quicker and/or ask for payment up front. In some cases it is not possible for customers to pay quicker, and if so, then it may make sense to obtain a line of credit.

Problem: spending cash before a sale: This greatly applies to retailers that have to pay for inventory and then wait until it is sold to receive cash. It can also apply to paying for equipment, wages for employees, and various other expenses.

Solutions: For inventory-driven businesses, monitor your inventory to make sure it coincides with your sales cycle and that inventory is actually selling. Some retailers, specifically online retailers, may be able to have items shipped directly from the manufacturer or distributor once a sale is made, which lowers the amount of cash needed for inventory. Also, stretching out payment terms to vendors is helpful.

For service-based businesses, wages can be one of the largest expenses. Make sure that employees are working on a project that is planned as opposed to wasting valuable time on longer-term projects that cannot be taken to completion, thus not being able to be paid.

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Where is all of the Money Going?

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You’re a small business owner, keeping busy, but there always seems to not be enough cash.  An entire book can be written on this subject, but here are a few reasons why you may feel your business is short on cash:

Taking too Much: Unless you have other income sources, you need to either take distributions or a paycheck from your business to live. The problem arises when you take too much and leave the business cash-starved.

Paying off Debts: If you have business debt from loans or credit cards, it can create a cash drain. Even if your business is showing that you have made a profit, you may not have much cash to show for it. This is because only the interest paid actually shows up on the profit and loss statement.

Collections: If you don’t actually collect the money from customers then it is the same as never having made the sale. Actually, it is worse because you have spent your time and incurred expenses.  If this is an ongoing problem, then you need to modify your collection procedures.

Grow the Business Profitably: Every business needs to grow every year as expenses usually only increase.  If the business needs more cash and you do too, then you need to grow both your sales and profits.

These ideas may seem simplistic, but they are extremely powerful. They all relate on the importance of using your financial information, a.k.a. boring accounting stuff, to run your business better.

Are You Overwhelmed By Debt?

Why or how do so many people get into trouble with debt? When does it become a problem? There are so many reasons, such as job loss or, health problems, but overall it is a disconnect between income and spending, and not enough focus on financial management.

I’d like to share a few simple ways to reduce your debt and help to minimize its use in the future. If you keep it simple, you are more likely to be successful.

Stop incurring more debt: You can’t get out of debt if you are still using your credit cards. Do not increase your debt or you will never get out.

Emergency fund: By building up an emergency fund, you are less likely to take upon more debt for something unexpected. For now, it can be around $1,000 to start. Ideally, you will want to work towards 3 to 6 months worth of expenses, but it doesn’t make sense at this point to save $10,000 and simultaneously have a $10,000 credit card balance.

Budget: If you are serious about reducing your debt and improving your financial situation, you need to take the time to make a budget. You can use software, such as Excel or Quicken, but a very simple and effective way is to use envelopes. For example, if you are paid weekly by your employer and spend an average of $200 a week on groceries, then place $200 in an envelope labeled groceries. When you go food shopping, bring this envelope so that you can only spend$200 or less. This can be done with all other expenses. It is simplistic, but if it is done right it is extremely effective. My father taught me this one.

Know what you owe and prioritize: Make a list of all of the debts you owe, including credit cards, auto loans, equity loans, mortgages, student loans, etc. Now you need to work at chipping away those debts. The rational place to start is with the highest interest debt, but I don’t recommend this. You should actually try to pay off the smallest balances first because it will give a sense of accomplishment. Once the smallest is paid off, then use that payment toward the next balance. Finances are extremely psychological, as most of our financial decisions are emotional-based.

These few steps are a good place to start to manage and reduce your debt. If you are serious about debt elimination, you will not look for shortcuts, but rather ways to increase your income to pay off your debt sooner and take control. Focus and simplicity are the keys. If you need more help you can contact my office. Additionally, there is an excellent book on this topic that parallels my thoughts on debt, entitled “The Total Money Makeover” by Dave Ramsey.