If I’m Making a Profit, Why am I Broke?
You’ve filed your taxes, right? Or at least filed for an extension? Either way, you had to somehow come up with money to pay the IRS. Ouch! That hurt.
Here’s the good news: You run a profitable business. That’s why you owe taxes. But why was there no money in your bank account? Here’s a dirty little not-so-secret of small businesses and the self-employed: you can be profitable but not have cash.
How can that be?
In a small business, it’s not just about making money, it’s about managing your money. It’s all about “cash flow.”
So while the memory of having to come up with a chunk of cash is still fresh, let’s talk about some easy money management solutions. A few simple steps and you’ll be on your way to an excellent credit rating, a great relationship with a bank, and a good night’s sleep because you can pay your bills.
1. Pay your bills on time every month. Notice I didn’t say pay your bills in full every month. That’s not necessarily realistic. While you don’t want to run up the interest that accrues if you don’t pay your bills in full, sometimes it’s just not possible. I juggled credit card payments for years when I started my business. But every month, every creditor got paid at least the minimum amount—on time. So set up systems, such as automatic bill payments, to pay at least the minimum payment.
2. Send out your invoices on time every month. Believe it or not, many business owners are unbelievably tardy in sending out their bills. Truthfully, I was. And I have contractors that sometimes bill me as much as six months late. Sometimes more! When you bill your clients late, they pay you even later. So stop it! Send your invoices immediately when someone incurs a debt, and certainly no less frequently than monthly.
3. Talk to your vendors. Your vendors control your payment terms. They’re the ones who say whether you have 30 days or 120 days to pay. That makes a huge difference in your cash flow. Explain your business plan. Most importantly, always take their calls, even when, especially when, you owe them money.
4. Ask vendors if they’ll take credit cards. That not only gives you more time to pay—if you need it—but you can earn cash back or other rewards. Christina Stembel, owner of one of my favorite companies – Farmgirl Flowers—uses credit cards to grow her business. “Before starting Farmgirl Flowers I wasn’t a points person,” said Stembel. “I wasn’t even a credit card person; I’d used debit cards my whole life.! But as a small business owner, cash flow management is always top of mind. With the 2% cash back I earn with my Spark Cash card from Capital One on all my business expenditures, I’m able to use those cash back rewards to reinvest into the business. As a bootstrapped company, every decision I make has to make sense, and earning cash rewards on business expenses I’d make with or without those rewards just makes sense.”
5. Take your banker to lunch. A good business banker can make or break a company. Mine helped save my business at least twice. Find a bank and a banker who’ll take time to talk to you, learn about your business and understand your ups and downs. Don’t have a banker? Time to get one, and a line of credit to access money if times get tough or opportunities arise.
6. Get a free credit report. Small businesses get credit based on the owner’s credit-worthiness. You’re entitled to one free credit report per year from each of the three major credit reporting agencies. Get it at only www.AnnualCreditReport.com (watch out for scam sites). Clear up any inaccuracies and keep your personal credit clean.
7. Go after overdue accounts, especially big ones. If you’ve provided goods or services, you deserve to be paid. Otherwise, you’re in the lending business, and you can’t afford that. Make collecting overdue invoices a continual part of your business. Don’t be shy!
8. Limit the amount of credit you give to any one customer, even large corporations. Big companies often pay slowly, and the risk of bankruptcy of a big customer certainly challenged my business in the past. Never allow yourself to be dependent on one customer’s financial health.
9. Set money aside. Yes, I know you just made a huge sale, and the money is burning a hole in your bank account. Don’t spend it all! In a small business, you’re going to ride the roller coaster of cash flow. It helps to be just a little bit paranoid about where your next dollar will come from.
A few simple steps and you can be both profitable and have money in the bank at your small business.
About Rhonda Abrams
Rhonda Abrams has helped millions launch and grow successful businesses. Her first book, Successful Business Plan: Secrets & Strategies, just published its seventh edition, and is the bestselling business plan guide of all time. Rhonda’s books have sold more than 2 million copies and been translated into 30 languages, including the popular Six-Week Startup, Business Plan in a Day, and Entrepreneurship: A Real-World Approach. Rhonda is the entrepreneurship/small business columnist for USA Today and, an entrepreneur herself, is the founder and President of PlanningShop.
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