Working Capital & Your Business Pt. 1

Your bottom line is the one thing that can make or break your business. If you run your business at a negative bottom line, eventually you will have to close it. If you're a self-funding small business owner you have to find someone to help fund your business. We all know new startups generally run negative or close in the first three years. If you don't take the necessary steps to ensure you are protecting your bottom line and that your business is running at a profit, you will close the business. 

Some of my clients are good-hearted who have a hard time charging people what they should or paying people appropriately. After a while, those kinds of business owners burn themselves out and resent the very people they opened the business to help. Yes, it takes time to build a business and for the business to prove itself. However, if your business has been running at a negative for, say, five or eight years, it will start to wear on you because the model you have in place isn't working. Poor cash-flow management will go within a business for 10, 15, 20 years and people will keep their business open but complain that their company doesn't make enough money. The important distinction is, does your business make money but having a cash flow issue, or does the business not making enough money.

The business can have one of three issues:
1- The business doesn't make enough money to support itself as a business.
2- The business doesn't make enough money to support itself and pay you a salary to support your home life.
3- The business makes money but it feels like it doesn't because you're anxious, late on your bills (though you do pay them) but your bank account goes from black to red and black to red. 

All three of those are anxiety-inducing but if you look at how many years the problem is going on you can determine where the issue lies. If you've been fluctuating between red and black for years, it's probably a cash flow issue and not an income and expense issue. If you've been doing it for just a couple of years you'd have to look at your books. What you want to figure out though is if your business is going into debt or if you personally are going into debt. If your business isn't making enough money to support its expenses, then you're not pulling money out, but you're putting money in (How much has your business paid you versus how much have you paid into the business during the year). If you've put in a lot more than you've pulled out your company isn't making enough to cover its own expenses. If you're putting money into the company and you're able to pull more out than you put in then your company is earning enough to cover its expenses but it may not be able to cover you and its expenses. If the money you pull out covers you and your living expenses and you are putting a little back into the business but are still able to cover your expenses at home, there's a cash flow problem. 

Are you going into debt? Take your business and personal credit cards and accounts (including your saving accounts) from last year and then again for this year and add up the totals. If the net value of those accounts is less this year than it was last year then you're going into the negative. If you find, once you've done the calculation and find that your net worth is pretty much the same, you may feel like crap, but the good news is you just have a cash flow management problem. You're making all the ends meet, you just feel like you're scrimping, saving, and pinching pennies, but you just have a cash flow management problem. 

Once you've identified that you have a cash flow problem, the detailed solution of how you deal with that has a lot to do with how you do your spending and how your income comes in. A lot of people think it's just the spending is too high, but part of the problem is the income. Most companies don't make a steady income; some companies' income comes at the beginning of the month or certain times of the year. My client who runs a CPR company made all his money in the summer because he taught CPR to people around swimming pools so the summer was the only time of the year when he earned money. Look at 3 months worth of data from your deposits and see if your income has a cycle. IF you have a seasonal business you might need to look at 3 years' worth of income to figure that out. Every business has a different flow. If you always have movement to your income, take an average. Shipping companies earn money all year long and do their highest numbers at the end of the year around the holidays. They would divide the total they made all year over the 12 months and that is their average income. 

Most expenses are also cyclical. Bills like rent and insurance are usually due around the beginning of the month. Payroll for your employees usually happens at the same time each month and yearly bills are due the same time each year. Take out a piece of paper and write down every bill and when it's due (Divide them into yearly or unusual/one-off bills). After you've done that divide the month into 10-day chunks (because you can usually move a bill due date within a 10-day period). Your income frequency doesn't match your expenses, so shift the time the bills are due, and/or shift the time when you bill your clients. Shifting will help but a sense of security and confidence will come when you build a working capital cushion in your account. A cushion will help you account for the variability that comes when things are due at a time when you don't have the money. 

A working capital cushion looks like you making enough money to support your business and spending what you have. That feels good for a little while but then the account goes negative and you get anxious. I have repeatedly seen this cycle be most people's human nature-- they save a certain amount and save until they can and then they stop instead of stopping before they deplete. You're happy and feel successful and powerful when you have money and are unhappy and don't feel successful when you don't have money. Working capital takes the same behavior to another level-- instead of your account going from zero to $5,000 and then back down to zero it goes from $1,000 to $6,000 and then back to $1,000. You never allow the $1,000 to be spent and therefore you always have the cushion.