Many small business owners struggle financially whether their ventures are profitable or not.
The single greatest cause of financial struggles in a profitable business is poor cash flow management, often arising from ignorance, financial indiscipline or both.
In simple terms, cash flow is the amount of money moving in (flowing in) and out of your business within a given period of time, usually a month.
Money mainly comes in from customers buying your products or paying for products supplied earlier on credit. It can also come in through capital injection or loans from external sources. It goes out through payment of debts, loans, purchase of goods for sale, taxes and other business expenses.
Cash flow problems arise when the money flowing into the business is less than the money flowing out or needed to flow out for business to operate smoothly.
This occurs when the money generated by the business is not enough to meet the demands or the business owner is taking too much money from the business and using it elsewhere, or within the business but on expansion. For example, a business owner may take some of the sales revenue to finance personal items like cars, land, lifestyle, or open other branches or increase product range.
The latter is quite significant because it represents a kind of scenario where one bites more than they can chew and end up choking, figuratively speaking.
The result of poor cash flow management is a profitable business that cannot meet its financial obligations on time. If this persists, several things may go wrong: suppliers may refuse to deliver goods, staff gets demotivated, creditors may take unfavorable action and the owners spend more time putting out ‘fires’ than working.
Financial discipline is the best solution to cash flow problems. It is not getting more sales, more revenue streams, more loans or even better margins.
The first financial discipline that every entrepreneur must embrace is that of separating business finances from their personal account and should ‘pay themselves’ at the end of the month rather than spend company’s money on personal expenses.
As a matter of fact, the business owners who struggle with cash flow spend sleepless nights worrying. They hardly keep separate bank accounts and when they do, they don’t respect it.
Perhaps the question they ask themselves is how do they know how much salary to pay themselves when they are still struggling to keep the business afloat?
Unfortunately, there is no other way out. Treat yourself as an employee of your business and take a salary commensurate with your business revenue and ability to pay. If you are working for another company, you would not try to solve all your emergencies and those of friends and relatives from the sales revenue. Treat business revenue as sacred and only take profit at the right time and in a planned manner.
This article first appeared on The Business Daily on February 19, 2019