Many small businesses – including profitable businesses – go under because they fail to practice a few basic accounting practices. According to the U.S. Small Business Administration, poor cash flow is one of the top reasons small businesses fail.
Planning and monitoring your cash flow and keeping a current balance sheet will help you make sure you have the capital you need (including cash and credit) to run your business when you need it most.
Not properly planning the timing of your receivables and payables can lead to bankruptcy.
For example, you offer your customers 60-day terms, but your vendors and suppliers require payment within 30 days. Even if you sell $10,000 worth of goods that cost you $5,000 to make, you can still go under if you can't pay your $5,000 worth of bills on time.
Even if vendors and suppliers don't take you to court, they might simply cut you off from more orders, which means you can't make your product, order supplies for your business or otherwise keep your company running.
This is why it's possible for profitable businesses to fail.
Another important aspect of running a business is knowing what your company is worth at any given time.
If you need capital, lenders and investors will want a current snapshot of your assets, liabilities, receivables, payables, cash flow, profit-and-loss statements and your net worth. That will require a balance sheet, among other documents.
A cash flow statement is a financial document that shows when your bills are due and when your income is expected. This is different than a budget, which often shows only when bills are accrued and income is booked.
Budgets can also be misleading because they often contain monthly averages. For example, if you have an insurance premium that comes to $6,000 per year, you might budget $500 per month for insurance. If your bi-annual premiums are due in January and July, you might not remember to keep enough money on hand to make those $3,000 premium payments on time.
A cash flow statement lets you plot the timing of your payables and receivables so you can see when funds might be tight. This will allow you to arrange for more credit, call customers who are overdue with their payments, or discount receivables or inventory to get cash in quicker.
You should check your cash flow statement at least twice each month to make sure you have enough warning to make financial adjustments to meet your obligations.
A balance sheet is a simple document that is a list of your assets and liabilities, showing your net worth. This is an important document if you are applying for a loan, looking for an investor or thinking about taking on a partner.
Depending on your need for a balance sheet, you can add non-tangible assets such as your customer list, goodwill, logo, website, location and other factors that make your business more valuable than one started from scratch.
Keeping an up-to-date balance sheet lets you determine how well your business is doing, how you might strengthen your assets and what liabilities might be dragging you down. Your monthly budget or profit-and-loss statement might show that you're humming along profitably from sales, but a balance sheet can paint a different picture.
Update your balance sheet at the end of each month to keep an eye on how well your business is really doing to see if any of your assets are getting old and will soon need to be replaced, or if any liabilities are starting to sneak up on you and possibly become unmanageable.
Unlike an annual budget, you'll need to keep updating your balance sheet and cash flow statement at least monthly. An annual budget should be a living document that you review and update based on your actual sales and expenses, but your balance sheet and cash flow statement change more rapidly.
As you review your balance sheet each month, look at how the value of your business is increasing or decreasing. This will help you make strategic decisions such as whether or not you want to drop certain products or offer new services. If you see your debt service (interest) is hurting your business, you might then decide to liquidate some assets (even at a loss), to get rid of interest-bearing debt.
Checking your cash flow statement each month will give you advance notice about whether you need to switch money from one account to another, pay down a credit card, apply for a bank bridge loan or make other temporary financial adjustments to help keep you operating smoothly.
If you are not depreciating your assets, ask a tax specialist how to do this. When you depreciate an asset, you decrease its value on your balance sheet. This can help you lower your tax liability at the end of the year. For example, if you have a company truck, it's not going to be worth as much at the end of the year as it was at the beginning of the year. This asset should be depreciated on your books.
You may have other assets that increase in value, such as your customer list (which is more valuable as you add names), website (as you generate more traffic) or your brand (as it becomes better known via your marketing).
Ask your banker about which financial documents they will require to lend you money, issue a credit card or extend other forms of capital to you as your business grows. Seacoast financial experts are available to serve their customers and provide advice on a variety of financial products from vehicle loans, credit cards, payment processing, payroll solutions and other offerings.
To learn more about your options, call us now or schedule an appointment with an advisor.