Some small business owners find themselves in the challenging position of running a business that can appear profitable but still find that they have no money in the bank. It’s a serious situation to address. After all, a lack of proper cash flow is one of the leading causes of small business failure.
Here are three reasons profitable businesses often have little money in the bank and what a business owner can do to address these situations.
1. Using your business money for personal reasons
Owners often use their business bank account as a personal bank account, withdrawing the money as they need it. Of course, business owners still need to earn a living. Instead of using the business account like their personal account, entrepreneurs should pay themselves a wage and transfer that from the business account to their personal account at set times. If they run out of their personal money, they can’t return to the business account for more money until their next payment date.
Regularly using 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 this is done when customers pay their bills. Not sending out invoices promptly, not following up when customers fail to pay, and not conducting the proper credit checks on customers can all put cash flow in danger.
Business owners need to send out invoices with clear payment terms and follow up immediately if customers disobey them. They can also put procedures in place to deter customers who are unlikely to pay for work done or to lessen the damage if clients attempt to get away without paying. Asking for deposits, for example, is a great way to manage both customers and cash flow.
3. Not being prepared at tax time
Many small business owners see taxes as something they don’t need to worry about till later. When tax time rolls around, they then don’t have enough money set aside to pay the ATO. In some cases, a business may suddenly increase profits but not increase the amount set aside for taxes.
Business owners need to treat their taxes as a regular ongoing expense. Set money aside each month to pay taxes. Then if there is a significant increase in profits, they will then need to put aside even more money. Being over-prepared is better than being caught with not enough.
Final thoughts
There are steps business owners can take to ensure that their business makes a profit and has enough money in the bank. First, they need to learn how to read and understand their balance sheet and debtor’s ledger. These show the amount of money that is coming in and where it’s going. It also highlights which customers aren’t consistently paying their bills.
Entrepreneurs should try to avoid using the business bank account for their own personal expenses. Instead, try instead to put a set amount of funds into their own personal account and only have that amount as personal expenses.
Finally, business owners need to understand their liabilities. Liabilities affect how much cash is available for their business, and even small liabilities can add up quickly. It’s good to know how much is owed, paid monthly, and when those bills are due.
Entrepreneurs can better understand and manage their business by keeping track of the money coming into their business and when it leaves. This will help ensure they are making a profit and that there is actually money in the bank.
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