Profit is what you get from delivering value to customers, and that’s what people start new businesses to do. But the hard part is survival. And when you talk to business owners, or study the stats, survival is harder than you’d expect. More than 20 percent of new businesses fail during their first year, and about 90 percent eventually. Cash-flow problems are the reason cited most often (around 82 percent) by failed businesses.
Cash flow is the lifeblood of your business. Positive cash flow means you have more money coming in than going out, and, at first blush, it sounds simple: all you have to do is count the money. But while that may work for your personal accounts, balancing cash flow is extremely complex for businesses.
Cash flow is so intricately woven into the health of your business that just about any management mistake can eventually cause problems, especially if your company is changing or growing rapidly. Since trouble with cash flow is usually serious, do your best to avoid the mistakes that cause shortages.
Business Planning
The time to plan is before you go into business. When an established business needs to change in any significant way, it’s time for business planning.
One of the first steps in planning a successful business is setting goals. Without an ultimate target and ways to measure progress toward it, there’s no way to tell whether your efforts are paying off. Before making any major changes to your business plan, outline your short- and long-term goals. Where do you expect to be in the first year? The second? How about five? By setting long-term goals and short-term benchmarks, you know whether your decisions are pushing you closer to or farther from your goals. To get on track with goal-setting, create a set that is SMART. This stands for specific, measurable, attainable, relevant and timely.
Once you have your goals and vision in place, it’s time to put them into an operating framework. There are various operating frameworks entrepreneurs use, like the Entrepreneurial Operating System, or EOS. EOS, for example, keeps you on course by making sure your action plan and people, tools, technology and training all work in harmony.
New owners often skip crucial legal steps in the excitement of planning a new venture. But getting excited is no substitute for carefully researching the legal requirements in your jurisdiction and getting expert advice on choosing your business structure. Some skip incorporation or fail to register a business name or take other vital legal steps. Others create new products, develop a brand or create a logo without considering the need for a trademark or patent.
Keep in mind that any one of these oversights could put you out of business later if they cause an interruption in your cash flow. Before you open, consult professionals like accountants and patent attorneys.
No one starts a business because they’re so excited about accounting. Most new and small-business owners aren’t accounting experts, yet the majority of them do their own bookkeeping.
That is a big mistake, because the back office is the control center of your business. More than just recording income and expenditures, it takes the temperature of your financial health, shows whether your strategies are working and what the future looks like. If your back office is a mess, your business is a mess, because when cash flow is the lifeblood of your business, your back office is an artery.
It’s not just about working well. Your back office also needs to be secure. It needs enough staff to separate duties, and checks and balances, policies, security and compliance protocols that protect against fraud inside and threats from outside.
You may have a vision of the people you want as customers, but sometimes forget to translate that into reality. Defining your target market (the group you expect to bring in most of your sales) and creating an ideal customer profile of the specific type of person most likely to buy are essential for creating a successful marketing program. Without those two things, you have no direction for your marketing and sales training. Once you define your target market and ideal customer, you can tailor your ads and sales scripts to fit them.
Otherwise, you risk wasting money on a marketing message with poor return on investment. Or it could turn vague because you try to appeal to everyone. The result is that nobody understands your brand or what you’re offering them.
That’s not to say all marketing spending is bad. On the contrary, spending in the right channels with a direct message works far better and brings a much higher return.
Learning to Delegate Responsibility
Nearly every new entrepreneur worries about making a mistake. But refusing to delegate responsibility isn’t the solution. Sooner or later a shoestring approach gets stretched too thin. You simply won’t have enough time or energy to do everything, and no owner can be expert in every area, anyway. While it seems like you’re saving, you’re not if it’s cutting into your productivity.
Delegating is a critical success factor, but it takes time and deliberate effort to find the right people, train them and learn to trust them. The more hands-on you are with every single task, the slower your business goes and the less productive it becomes.
If your staff is the backbone of your business, never forget that labor is also the biggest expense in most businesses, especially service businesses. If you want your business to grow, you’ll have to take on more staff. But hiring too many people too early can be a drain on your budget with no return on labor. Hiring the wrong people can lead to expensive turnover. Overstaffing or the wrong hires will drain cash flow fast.
While hiring the right people can bring great dividends, you don’t want your payroll to run wild in the meantime. Think carefully about who you really need, and hire only when you have good reason to believe the position will pay off soon. Look for competence, trustworthiness and people who share your core values.
Whenever possible, outsource non-core functions like marketing, bookkeeping, legal and logistics to contractors instead of hiring. You save an incredible amount of overhead and labor. Not only that, but you get real experts. And you get to save more by writing off payments to third-party providers as a business expense.
Growth can be both exciting and healthy. But growing too fast can drain your cash. After a jump in revenue, make sure it’s a real trend before hiring new staff, leasing a bigger office, paying top dollar to ramp up production and generally blowing your budget in preparation for high demand. If it was a one-time spike, and you’re getting ready for more business that never shows up, the higher expenses could well mean more money going out than coming in. That anomaly can put you out of business.
It’s easy to get excited and quickly sign leases and buy equipment. Spending lots of money early cuts cash flow quick. And even spending on a smart thing like buying an office instead of renting can be a mistake because the timing is bad. Large expenses cut your financial flexibility and can overextend your business.
When you finally need to spend money to ramp up growth - buy equipment, hire staff, renovate, lease new space - be careful about when you do it. Without a lengthy sales history, and profit trends that can support your decision, it’s not advisable.
Yet there are times when it’s right to spend. You have to spend money to make money. Under-spending means under-delivering across the company, in products, service, customer support, advertising and sales.
The cash flow must be mastered, and to do so, you need to find the balance between spending too little and too much. It is a critical dilemma, and a difficult one to solve.
Save Time and Work More Efficiently
Spending your time doing low-value tasks can cost more than money. It loses your time, and your time may be the most valuable asset in the whole company. Analyze all your activities. Replace the ones with a low ROI with ones that will pay the most in the long term.
It’s hard to grow today’s businesses without a robust tech stack. If you’re not making the most of technology, not only are you wasting time and money, but you miss on opportunities.
Here are some of the popular tools for savings, efficiency and a smoother workflow.
- QuickBooks Time for time tracking
- PandaDoc for documents
- Microsoft OneNote for notes
- Google Drive for cloud storage
- Teamwork for project management
- Bridge for training
Life’s a little slower if every day starts with a search for notes, for files on your computer, for the work you were doing last time and even for real things like your shoes. Tools like the ones above help you keep both your personal and business life well-organized, so every day is as efficient as it can be.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
