Have you ever wished there were red flags to alert you when your business was heading into a slump? Maybe you can find a miracle tool that would alert you before wading into uncharted waters where that cause so many small businesses to sink? The good news is, there are tools that will do just this.
Money Curve
Following the money curve is more difficult than it appears. The first step is to learn how to budget. One of the most common business mistakes is spending money as it comes in and leaving nothing for major projects such as an advertising campaign, upgrading equipment, or starting a passive stream of income.
Cash management starts with the ability to budget money and prepare a cash flow projection. If this tool will tell a bank whether the business is a good credit risk, then it will tell the business owner how healthy the company is.
The second half of the strategy is the Cash Flow Statement. The projection lets the owner calculate what they need in the future. The statement tracks the money that goes out. The statement can be created based on the actual cash, including personal money, or it can be based solely on the business's books.
Watch for Falling Sales
Never wait until the cash flow starts a downward trend. A healthy business should have a gradually upward curve. A level or wavy curve is a sign of trouble. An advertising campaign should be started at least six months before the cash flow starts a downward turn.
Another thing to measure is profit margin. Sales and profit margins are different and can be totally unrelated. Sales and Revenues are the money that comes into the business. Profits are the money left over after the expenses are withdrawn.
Two companies may earn $10 000. One earns $1000 profit, and the other earns $5000 profits. Calculate the profit margin. Create a 'cut off' rate. Anything below that level should be considered a 'warning.'
Borrowing
Borrowing money to pay debts is a sure sign of trouble. This doesn't mean that it is wrong to borrow. The amount borrowed should never climb above 20% of revenue. Any amounts above this should be considered a 'warning' and be corrected as soon as possible.
Another aspect of borrowing is to calculate the amount of money spent on interest in a year. The lower interest rates are important, but so is the term of the loan. Businesses should keep the term as short as possible.
Past Due Notices
This is the ultimate red flag or warning sign. It signals to the business owner that they have lost a grip on the business's cash flow. No matter how much, or how little, a business has coming in, it is vital to ensure that the business is self sustaining.
Stealing from The Company
The company should be seen as a separate entity. Its cash belongs to it. A business needs to be nurtured. In the brick and mortar world, a business should be self-supportive for the first five years.
Traditionally, business owners never expected the business to support the family through this time. Internet businesses have a shorter span, but they still need to be nurtured.
Every time money is removed from the company the business owner should tack a 'red flag' to their cash flow charts. All revenue should be returned to the business until it is self sustaining with enough 'cash in reserves' to avoid at least on emergency, and support expansion.
How to Avoid Problems
Get Help: There are thousands of qualified professionals who freelance for a fraction of what a company would charge.
Be Truthful: Avoiding issues, brushing over problems, and lying to people who can help should all be considered warning signs. When you run into financial trouble, then head to the bank. They have a lot in stake and will help, even if the business owner hasn't borrowed any money.
Save Money: Save money, even if it only means sticking $1 into a jar every week.
Cut Costs: There are some vital questions to ask before spending any money. Do I need it? Can I get it cheaper? Am I buying this because I 'want' it? How long can I do without? What problems will I encounter if I don't buy this?'
Emergency Plan: This is a plan of action that you'll use to help avoid problems.
There are several ways to use these tools. One business owner can keep a chart. Another one may put red pins on a cork board. Another will create a strategy plan to solve the problem. Whatever is used, it should be considered a vital part of business success.
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