Cash Flow is King. Managing It Is Easier Than You Think.

on November 10, 2017

Managing and predicting cash flow as a small business owner can be very challenging. Especially when you’re starting out, you might find yourself in a situation of having committed sales, but unpaid invoices. Or, as you expand, you might have some growing costs that are higher than projected or coincide with a slow month.

Whatever the case may be, chances are that you will likely end up in the unfortunate position of not having enough money to make payroll in a given pay period. So what do you do?

In a previous post, we covered the hierarchy of small business needs and expenses. Now, we’ll take the concept a step further to help you prioritize what to pay when money is tight, and how to work the float with resources you might already have access to.

What You Must Pay Before You Can Pass Go and Collect $200

While all expenses related to your small business are important to its long-term operations, some expenses are more important, or more pressing, than others. Let’s first discuss which expenses are non-negotiable, before we get into how you might be able to find or create emergency reserves.

  • Insurance: Ensuring that your coverage continues ensures that your business is protected. Don’t skip premium payments for critical policies, such as your Business Owner Policy (BOP) and car insurance; allowing either to lapse puts your business at risk and opens you up to personal liability issues. When it comes to benefits, you must pay workers compensation and health insurance. Certain policies that are not “mission critical,” such as errors and omissions policies, may have to wait. If you’re not clear which coverage is a must-have and which can wait, you should consult your accountant, lawyer, or financial advisor. (See: “Safety” in our Small Business Hierarchy)
  • Rent and utilities: Operating costs such as rent, electricity, and telephone/Wi-Fi are what keep your doors open, your lights on, and your phones (hopefully ringing). Lapsing on any one of these bills will impact your business continuity and ability to keep things going day-to-day. Additionally, for things like utilities, you will often have to pay a charge for reinstating service, and a lapsed payment could have credit implications for your business. (See: “Physiological” in our Small Business Hierarchy)
  • Payroll*: Payroll is a mission critical expense from two perspective—employee confidence and continuity, and tax implications. If you don’t pay your employees, the likelihood is most will be unable to stay on, and your reputation as an employer will suffer. Additionally, if you don’t pay and file payroll taxes, you put your business at risk of fines, audits, and ultimately, failure. (See: “Belonging” in our Small Business Hierarchy)

Will You Win the Award for Congeniality?

Unlike the expenses outlined in the previous section, there are some business costs that might be able to wait, or be negotiated for lower payments or an extended deadline. These may include:

  • Vendors and suppliers. If you own a retail, restaurant, or other business where tangible goods are sold, during a tough month it is more important than ever to ensure that your inventory doesn’t run out—every sale will count. But that doesn’t mean that your costs have to be fixed; reach out to your vendors and suppliers to see if they can offer you some wiggle room in terms of payment terms or payment schedule.
  • Accounts payable and credit card debt. Depending on the type of debt, and your business credit standing, you may be able to delay or consolidate payments (talk to the party you owe money to and ask for an extension of time to pay it off). Credit card debt can offer flexibility in timing repayment, but keep in mind that this will likely result in a significant increase in your interest rate. If you’re not sure if that cost will be worthwhile in the long run, discuss this option with your accountant or financial advisor.
  • Other. In our Small Business Hierarchy, the top two needs are Esteem and Self-actualization. Think of things like advertising, marketing, promotion, tradeshows, new product development, innovation, business expansion. Put plainly, these are “nice-to-haves.” If you are strapped for cash in a given time period, you should pause any such expenses.

Your ability to delay non-critical expenses will often come down to several factors: your relationship with the vendor or partner, what you ask for, and the way you ask. For these reasons alone, it’s important that as a small business owner you take care to maintain a positive relationship and open line of communication, even in cases where you may “break-up” with a vendor. The small business world can be small and you never know when you might need a favor or the benefit of the doubt.

When it comes to structuring a proposal for a change in payment schedule or terms, you should work through your approach with your accountant or financial advisor to make sure it is feasible for your business and compelling to your vendors, suppliers, and/or creditors.

Bottom Line

It’s important that as your small business grows, you actively work to understand what to expect in a given time period when it comes to profit and loss. Starting out, you likely won’t have the data or insight into the industry to know what to expect, what might be a peak period, and what might be “off-season” for your given business. You might want to consider working with an accountant or other financial advisor to accurately track and project what you should expect.

Even if you are meticulous in your bookkeeping and planning, however, the unexpected can still happen. Hopefully now you have a good understanding of how expenses should be prioritized at a high-level, and what is essential vs. non-essential in a period of cash flow crisis.

Our next post in this series will discuss a few ways you might be able to find cash in a crunch, if you are a still struggling to make essential expense payments.

Note*: It’s important to note that under the Fair Labor Standards Act, employers must give employees their paychecks; some state laws go even further and have time-based requirements for payroll. When it comes to payroll taxes, there are two categories to be aware of: employer taxes and trust fund taxes. Employers who don’t pay their share of employment taxes (including things like FICA, FUTA, and state unemployment) will be subject to interest and penalties, in the form of fines. Trust fund taxes include employees’ income tax withholding and their share of FICA; owners who do not pay trust fund taxes and are found willfully delinquent in said payment will be 100% liable for the unpaid amount.

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