Obviously, a small business will not last long if it is not making a profit. Yet even a profitable small business can go broke, if the owner doesn’t realize it takes cash, not profit, to pay off debt. And a small business can have an excess of cash and still go broke, depending on when it has the cash, and when the bills arrive. These 10 measures will help a profitable company avoid shutting down just because of a lack of cash:
1. Budget, budget, budget. Yes, that’s right, create three budgets. Budget one should be your dream circumstances, forecasting high sales and low expenses. Budget number two is grounded in reality: What are achievable sales goals and honest expense estimates? The third budget is the worst case scenario: Sales are barely coming in and you are spending more money than you can afford. By having multiple budget scenarios, your company will be prepared no matter what happens.
2. Predict the future by forecasting your cash flow. Create a monthly plan that determines how much cash the company will need throughout the year. Be sure to include expenses that aren’t due on a monthly basis. At the end of each month, compare the estimated cash flow to actual financial results — this way you can see how realistic your predictions are and make adjustments to next month’s plan.
3. Become a penny pincher. Resist the temptation to incur high-ticket expenses for things the company doesn’t really need, like fancy office furniture. Track business expenses, too — if a product isn’t making money, cut it loose.
4. Encourage clients to pay faster. Consider discounting accounts if payment is received within 15 days and charging late fees for payments that arrive after 30 days.
5. Don’t pay yourself. If you foresee tough times ahead, use your salary to pay off debt. You can always pay yourself when the company is liquid once again.
6. Trim the fat off your inventory. A large inventory is equal to a pile of cash that you can’t access.
7. Hire new employees only as a last resort. Many small business owners find it more cost-effective to outsource work to independent contractors instead of hiring new employees during times of need. Once you have exhausted all internal resources and investigated outsourcing options, then it’s time to hire a new employee.
8. Don’t buy, lease. Leasing equipment for your office is beneficial, because lease payments are tax-deductible and you don’t tie up cash paying off expensive items such as computers.
9. Have a garage sale. If you need cash in a hurry, have a tag sale to sell off excess inventory and goods, including costly furniture that isn’t being utilized or could easily be replaced with less expensive items.
10. Be green and recycle. To cut costs, load up copiers and printers with scrap paper; turn file folders inside out or re-label them instead of buying new. In short, anything you can use again, do.
Another suggestion: Contact a Bank One [http://www.bankone.com/access/] representative now — before things get rough — to see how Bank One can help you meet your small business’s cash flow needs. You might be surprised at the solutions that are possible when a professional banker is involved.