Most small businesses don't make it past the first two years. And most events industry companies are relatively small businesses. After all, they are not Microsoft. They face tremendous challenges. The key goal for any business is to stay solvent. What should small business owners focus on to stay solvent?
Although being solvent is defined in the accounting sense as having assets in excess of liabilities, this definition is not useful for small businesses. A more practical definition would be to have a consistently positive cash flow where inflows exceed outflows. That means spend less than you take in.
Here are some tips for consideration that should be paid attention to by every member of your company. After all, their employment rides on the company having enough money to pay them.
Increase Cash Inflows from Revenues
There is a difference between increasing sales (which is a given) and enhancing cash flows from sales. If you are a cash business, they might be the same. For a non-cash business, accelerate cash proceeds from revenues by:
- Offering discounts for cash payments or early payments, though be judicious in their use.
- Aggressively staying on top of receivables and improving the collections effort. Don't let AR go past normal industry practice, but do better than that.
Diversify Cash Inflows
If you are a seasonal business, or depend on one or two products/services or a few clients/customers for a majority of your revenues, then focus on diversifying your business. Over-dependence on a few customers or products for a long period limits your continued ability to remain solvent. Never assume that if you have one "big fish" client that you will always have that client, so make sure you have many customers so that if one is lost there is no great impact to your business.
Focus on Margins
Increasing sales is important but not at the expense of gross margins. Getting the optimal margin from each dollar of sale will increase cash inflows. To be direct here, selling a million-dollar project from which you gain $10,000 is not a good investment just to say that you sold and produced a million-dollar project. Could you have benefited more from 10 $100,000 projects from which your margin was $10,000 each?
Delay Cash Outflows or Match them closely to Inflows
Work with your vendors and suppliers to get favorable payment terms at least matching those offered to clients. If you have fixed payments on debt repayment, extend the term to lower your monthly liability.
If You Handle Multiple Accounts and Projects, Keep a Separate "Internal" Bank Account for Each and Spend Money Accordingly.
Therefore, if one project is cancelled, you are not in danger of spending money allocated to another project.
Reduce Cash Outflows
Carefully scrutinize all monthly expenditures with an aim to eliminate, reduce or defer such payments. Avoid spending cash on "nice-to-have-things" rather than on investments that get you an immediate return.
Change your Expenses to Become Variable with Revenues
Convert expenses to become variable with cash inflows so that you are not making payments regardless of your sales. Use temporary or outsourced people resources so there isn't a huge fixed burden.
Manage Your Growth
Don't overextend your infrastructure anticipating growth without first having adequate cash flows to support your monthly operations and a comfortable reserve. Taking on debt without proper cash flow planning could be detrimental to your business.
Always Remember that Profits Have to Account for Overhead Expenses
This means all of them, including your phone bill, rent, auto, taxes, workers comp, liability and auto insurance and so very many extras! You need profit to pay for all of those.
Never, EVER, spend deposit money that you are holding for a specific event.
These are some general tips that need to be customized to your business needs.
Regardless of your desire to remain solvent and potential delays in getting a consistently positive cash flow for your business, it is imperative that you recognize signals that might lead to insolvency. Such signals include but are not limited to:
- Difficulty in making payroll
- Inability to pay suppliers on time
- Skipping debt payments
- High employee turnover
- Selling fixed assets
- Owners forgoing salaries
- Maximizing credit lines
Ravi Patel is President and CEO of Patel CFO Services that provides outsourced CFO services for entrepreneurs. He can be reached at ravi.patel@patelCFOservices.com.