Here’s all you need to know about break-even analysis and how to calculate your break-even point. You have a great business idea, and now you want to know if it will be profitable. Alternatively, you may have already kickstarted your startup and are wondering when it will become profitable. Or, [...]
By Patrick Hogan
Small-business owners are said to be the lifeblood of economies around the globe. However, one out of five businesses fail in their first year (US. Bureau of Labor Statistics). A large reason behind this rate of failure is a lack of experience managing cash flows.
About 82% of businesses experience cash flow problems, with 29% reporting that they simply ran out of cash (InsuranceQuotes). Negative cash flow can severely hamper your ability to meet your financial obligations, make payroll, and fund your growth.
Whie first-time entrepreneurs need not be accounting geniuses, there are a few helpful practices that can make cash flow more manageable.
1. Know your break-even point.
Your break-even point is the level at which your revenues equal your expenses. While knowledge of your break-even point will not necessarily affect your cash flow, it is a good starting point when establishing your cash flow goals. It also serves as a guide for forecasting and budgeting plans.
2. Create a cash-flow-based budget and stick to it.
After determining your break-even point, the next step is to analyze your cash inflows and outflows and create a budget based on this information. You will need to track where your money comes from and where it usually goes within a specific period of time (usually a month). Remember to account for recurring rent payments and payroll expenses, and leave wiggle room in case of unforeseen expenditures.
However, spending time developing a budget is pointless if you don’t try your best to stick to it. Impulse spending on things that don’t bring value to your business will negatively impact your cash flow.
3. Vet potential clients before extending credit.
Every time you extend sales on credit, there will always be a risk of nonpayment. You may have to record your unpaid invoices as bad debts. However, that doesn’t mean there is nothing you can do to protect yourself.
You want a client who has a history of making payments on time, but in many Asian countries, credit scores aren’t available and there’s no way to check on a potential client’s history. That said, the show must go on, and you still have to run a business. One way to protect yourself is to get a high upfront payment before undertaking the work. Certain companies and insurance providers may also offer solutions protecting your cash flow from bad debt.
4. Send accurate invoices on a strict schedule.
Wrong invoice information is one of the most common causes of payment delays. If the mailing or email address of the customer is wrong, then you will end up waiting for payment that will never arrive. It will take some time to track the cause of the late payment, reissue the invoice, and then wait for payment yet again. To avoid this issue, make sure you have the right customer information before issuing an invoice, and of course, make sure your own financial information is correct.
In addition, always send the invoice on an agreed-upon schedule. This way, your customer gets ample time to prepare for payment, and will hopefully prioritize your payment.
5. Be proactive in collecting receivables.
A lot of first-time entrepreneurs feel uncomfortable asking clients about late payments. However, this is a costly mistake. It’s bound to be awkward at first, but when a business is on the line, it’s important to be proactive when collecting payments. The more time passes before you talk to customers, the more difficult it is to collect payment.
Managing your cash flow is a daunting task, especially if you have limited resources. Take note of these cash flow tips, and you’ll soon be able to handle cash flow issues like a professional.
About the Author
Patrick Hogan is the CEO of Handle.com, a software developer that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.