by Carrie Williams, CPA, Financial Coach, and Owner of Running Valley Financial 

Your lifelong dream of owning a small business has come true!  You have established your company, you have a product or service that you are passionate about, you start advertising, and you have interested clients and customers!  Congratulations!  You might be thinking that it’s smooth sailing from here until retirement, right?  Not quite.

According to the Bureau of Labor Statistics, 22% of all small businesses fail in their first year, 30% won’t make it past their second year, 50% will suffer failure within five years, and more than 70% won’t make it past 10 years. Ouch.  

Financial Responsibility is the Key to Success

There are many reasons for these grim stats, but with some education and careful planning, here’s one statistic you can avoid being a part of: nearly 30% of small businesses fail because they run out of cash.  

There are many facets to owning a successful business besides having a great product or service.  You also need to understand your business’s cash flow.  You want to ensure that your business will be around for the long haul, and if you employ others, that you are able to provide for their livelihoods in a consistent manner as well.  You don’t have to be an Accountant or a CPA, but it’s your responsibility to understand the basics of your numbers, and to know when to ask for help from an expert.

Tips for Understanding Your Cash Flow

Here are 5 actionable tips you can implement to have a financially responsible business.

1. Plan. Have a business plan that details the product or service you provide, your pricing, and an estimate of how many you plan to sell in the next 12 months, along with an estimate of the expenses that you expect to incur throughout the year.  Some of those expenses will be fixed (i.e., monthly costs that won’t change), and others may be variable based on your sales (i.e., raw materials needed to make the product).  Doing the math will show you if you have a profitable business plan or not.  Create a 12-month budget using those numbers.
2. Begin with the end in mind.  If you have a specific target of how much you want to make per year in your business, start with that number.  At your current pricing, determine how many products or services do you need to sell to achieve that number.  Don’t forget to factor in your fixed and variable expenses and set aside money for taxes.
3. Track your cash flow.  Cash flow is the lifeblood of a small business.  Set up a system to easily keep track of the revenue coming into your business and the expenses going out.  At the end of each month, review your actual transactions versus your plan and evaluate how your business performed, or where you can make adjustments next month to increase profitability.  Forecast the activity you expect the business to generate for the remainder of the year.
4. Don’t forget to plan for future large purchases.  Set aside cash in advance if you know that your business has annual expenses or if you know you will need to purchase or replace equipment used in your business.  Include these amounts in your business forecast so you don’t get surprised by them when they come up. 
5. Avoid making decisions based on your bank account balance.  This is where many business owners get tripped up.  Does this sound like you? When making a spending decision, you look to see how much money is in your business bank account.  If you have enough, you make the purchase.  By doing this, you may be setting yourself up for a cash flow issue if you are not considering what other expenses might be coming up that need to be covered.  It might also cause you to make impulse or unnecessary purchases.  Another tip is to first review your budget/forecast to ensure that expense was planned.

Your Business Doesn’t Have to be a Statistic

As a business owner, you can be empowered when it comes to understanding your business finances.  Be sure to prioritize some of your time toward reviewing your numbers at least weekly and utilize the resources of professionals to help you create additional strategies.  Following these tips can minimize the possibility of your business becoming a negative statistic and can instead maximize your cash flow for financial success.
*About Carrie Williams, CPA and Financial Coach Carrie Williams started her small business, Running Valley Financial Associates, in the middle of the pandemic because she saw a need for common-sense financial coaching.  She uses her passion for helping people and her skills of encouragement and money management to empower everyday people and small business owners to step into their money power with knowledge and confidence.  She resides in the Tampa area with her husband and very active children and spends her free time joyfully attending all of their sporting events and cheering them on.