The Bureau of Labor Statistics reports some scary numbers when it comes to new business survival rates: From 1994 to 2010, a solid 90 percent of businesses made it through the first year, but only about 50 percent remained after a five-year period. While many factors can contribute to the demise of a small business, disregarding your cash flow may be the number one killer.
Cash Flow Explained
Cash flow of a company is simply the amount of cash that flows in and out of your business. If you’re bringing in more cash than you’re spending, you’re blessed with a positive cash flow. If you’re spending more cash than you’re raking in, then you may eventually join the long list of failed businesses.
Wishful thinking doesn’t help your cash flow for your small business. Taking action can.
Step 1: Figure Out if Your Idea is Even Feasible
Before you even officially launch your business, the Small Business Administration recommends making a nice long list that can determine if your business will even work in the first place. Your list needs to contain:
Startup costs, such as licensing fees, business signs, stationery and cards
One-time expenses, such as a new computer system, ergonomically correct office chair, stereo system and redecorating for your new home office
Monthly expenses, combining fixed expenses like utilities with variable expenses like inventory, packaging and shipping
Categorizing tax qualifications
Calculating all this jazz doesn’t have to be a nightmare, thanks to a litany of free spreadsheets from the nonprofit association SCORE. The one on startup costs can help ensure you don’t leave anything out, while another on financial projections can help you gauge how much to target in sales.
Step 2: Secure Your Business Credit
Unless you happen to have money just lying around the house, you’ll probably need some seed money to take care of some of the startup and one-time expenses. Before you book someone to install your home office’s new oak paneling and stereo system, however, it’s imperative you decide which expenses are vital to the birth of your business. Kick out all the extraneous expenses and save them for later (sorry, stereo), then tally up what’s left.
Establish business credit so you can borrow seed money and take care of expenses. Separate your personal and business credit lines, so you’re not held personally liable down the line.
Also keep an eye out for cash-back credit cards that reward you each time you purchase items from select vendors. Then select one with vendors that sell stuff you’ll be consistently buying for your business.
Step 3: Monitor Your Cash Flow Going Forward
SCORE once again comes to your small business rescue with an ongoing cash flow template. Keep a keen eye on how much cash goes in and out of your business each month to ensure the latter doesn’t constantly outweigh the latter.