By David Axler, VP, Books, Banking and Tax, Wave
It is true that business owners are facing countless challenges due to the current pandemic. But, still, many people are ditching their 9 to 5 jobs to start their own businesses,
While these entrepreneurs are poster children for classic American hustle and grit, statistically speaking, they face an uphill battle. On average, 20% of small businesses fail within their first year, and less than half are profitable – and these are pre-pandemic numbers.
As continued labor shortages, supply chain disruptions and the rise of the Delta variant put a “return to normal” further out of reach creating a recipe for financial strain, business owners must have a firm grasp of their cash flow in order to continue to weather the storm.
Let’s explore what cash flow is, common challenges – how the pandemic has exacerbated them– and ways to address them even during times of uncertainty.
Defining and Measuring Cash Flow – Money In, Money Out
Defining cash flow is deceptively simple – it represents the movement of money in and out of your business. By knowing your cash flow, you can assess the financial health of your business. This gives you the power to grow strategically – even in a pandemic.
Manually keeping track of all of the money flowing in and out of your business is often a daunting task. So, it is reasonable to look for tools that can automate money management.
A cash flow statement is one of the most powerful tools a small business owner can have in their arsenal. Without it, you could find yourself without the proper guardrails when you’re in an adverse situation beyond your control – like a pandemic or a recession.
A cash flow statement helps you plan and prepare for cash flow surges and setbacks. So, it upholds your reputation with customers and lenders. An understanding and record of cash flow is also key to securing government loans.
By understanding this baseline, you can also begin to track your business’s cash flow patterns and make smarter business decisions over time. For example, if you identify that cash flow is down by 40% during a certain month or season, you’ll know that period isn’t the best time to invest in a new piece of equipment or hire a new employee.
Getting Paid on Time
The “money in” element of cash flow centers on getting paid. While it sounds simple enough, payment for services continues to be one of the biggest pain points for small business owners. In fact, over 70% of small business owners have waited between one to six months to be paid according to our Wave study.
While small business owners are usually at the mercy of their customers when it comes to timely payments, there are several steps they can take to speed up the process. These include sending digital invoices, accepting digital payments, setting automated invoice reminders for customers, and making payment terms clear. Doing these things become more important if you’re offering services. Making it as easy as possible for your customers to pay is key to ensuring the health of your cash flow.
Keeping Fees and Personal Finances in Check
Another way to improve cash flow is to look for a no-fee business bank account like Wave Money that provides quick access to funds deposited into your account, and automates bookkeeping. Small businesses pay an average of $450 in bank fees every year. To small businesses, $450 is a lot when every dollar could be the difference between hiring employees, paying bills, and even continuing to operate.
You should also make sure to keep your business account separate from your personal one. Mixing personal and business spending in one account makes it difficult to understand cash flow. What’s more, it makes it complicated to complete important tasks like tax preparation.
Preparing for the Unexpected
Cash flow management can be difficult and time-consuming, but it’s not impossible. With modern tools, you can easily delegate back-office tasks. As a result, you can focus on growing your business, seeking new revenue streams, and attracting customers.
The uncertainty of future variants is looming. So, it is the right time for businesses to double down on their cash flow management strategy now to weather whatever comes next.
David Axler is VP and GM, Books and Banking, at Wave, an all-in-one money management solution for small businesses.
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Source: Smart Hustle