August is here, and while you are at the beach or relaxing we want to remind you that business owners and start-ups have a common theme to six typical problems worth reviewing. Whether you do $100,000 in sales or $ 5 million, these might apply to you regardless of your growth mode:
- Not having enough cash reserves – Entrepreneurs know they’ll need money to start up operations, but most don’t realize it might take a least a year to realize a steady income from the company. The more advanced company needs to realize that payroll is probably growing and what if a few clients pay late? Start with adequate cash and maintain an appropriate level of working capital. Don’t fool yourself with wishful thinking that the money will somehow be there.
- Credit Cards – We all have heard the story about the business owner who funded their initial operations on credit cards for early stage survival, especially when they were tight on cash early on. Sometimes there is no choice, but small business loans, SBA products or best, a business line of credit (even personally guaranteed). The economy is now somewhat better and my banking community folks are telling me lines are now more available.
- Mixing personal and business finances – For clarity and potential business liability, do not mix personal and business funds. Distributions and salary should be on business accounts only and will make your accounting easier.
- Compensation – Lots of psychology around this one. Do not take too much out of your company and don’t reinvest all your profits- tax calculations can be complicated and we have heard it many times about not owing taxes because it’s all in the company. New owners need to remember you are no longer an employee getting your direct deposit.
- Accounts Receivable – What is your process to collect these? What are terms? Do you know that some clients are required to accept any cash discount you offer by their own finance department? This can be an incredible help with cash flow, trying to meet payroll for that new client you expanded for, and much cheaper than factoring.
- Poor Accounting – Numerous clients come in and their financials just don’t make any sense. Typical causes are lack of knowledge of accounting, software, or not having the time or interest to do it right. The problem is more visible when you are in growth mode and nothing can be analyzed or your banker has declined your credit application because you have “negative cash” or you decided to expense through all your fixed assets.
Business owners underestimate the true costs of launching a business, and many firms close their doors during growth mode. Why? usually the problem is cash flow and a lack of true understanding of where they are making (or losing) money because the time was not put in to build an accounting system that tells the story. Do you know your story?
Learn from others! Happy August
Rob and Rick