Some small business owners find themselves in the difficult position of running a business that appears to be profitable, but still having no money in the bank. It’s an important situation to address. After all, a lack of adequate cash flow is one of the main causes of small business failure. Here are three reasons profitable businesses have little money in the bank, and what business owners can do to address these situations.
1. Using business money for personal reasons
Business owners may be using their business bank account as a personal bank account, withdrawing the money as they see fit. Of course, business owners need to earn a living. Instead of using the business account like a personal account, entrepreneurs should give themselves a set amount (either wages, drawings or dividends) and transfer that from the business account to their personal account at set intervals. If their personal money runs out, they can’t go back to the business account for more money until their next withdrawal date.
Regular use of the business account, even for relatively small amounts, adds up and can have a drastic effect on a business’s cash flow.
2. Not collecting payments
Businesses need to make money, and they do so when customers pay their bills. Not sending out invoices in a timely manner, not following up when customers fail to pay and not conducting adequate credit checks on customers all put cash flow in jeopardy.
It’s best for business owners to send out invoices with clear payment terms and follow up immediately if customers violate those. They can also put procedures in place to avoid customers who are unlikely to pay for work done or to mitigate the damage if clients attempt to get away without paying. Requiring deposits, for example, are a great way to manage both cash flow and customers.
3. Not preparing for liabilities
Many small business owners see GST, PAYG withholding, superannuation and income tax as something they can worry about later. Then due dates roll around and they don’t have enough money set aside to pay these liabilities.
Business owners must be mindful of their tax and payroll liabilities, the due dates, and the penalties that may be imposed for late or non payment. Set money aside each week or month to pay these liabilities. If there is a drastic increase in profits, set aside even more money. Being prepared is far better than being caught with too little.
4. Not accounting for debt
Remember that flash new equipment or vehicle you purchased last year that you’re still paying for? Loans on equipment can often take a number of years to pay off. Each month those repayments are eating into your cash but aren’t reflected in your profit. When looking at your cash flow requirements, don’t forget about your loan repayments. And when looking at your debt, is it worth considering refinancing and consolidating? Talking to a finance broker or your bank about your options could save you thousands of dollars in interest.
There are steps business owners can take to ensure that their business makes a profit and has money in the bank. First, they should learn how to read and understand their balance sheet and debtors ledger. These show how much money is coming in and where it’s going. It also highlights which customers aren’t paying their bills.
Entrepreneurs should also avoid using the business bank account for personal expenses. Instead, you could pull a set amount of funds to your personal account and limit your personal expenses to that amount.
Finally, business owners must understand their liabilities. Liabilities affect how much cash is available in your business and even small liabilities add up quickly. Know how much is owed, how much is paid monthly and when those bills are due.
By keeping track of the money coming into your business and where it goes when it leaves, you can get a better handle on ensuring your business not only makes a profit but actually has money in the bank.
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