Lack of liquid assets is a common cause of failure among small businesses. With no cash on hand, businesses can’t pay for the medium- and long-term investments that come due now and then. Even worse, poor business financial management can render firms incapable of paying their regular obligations, such as vendor services and employee payroll. Such a business financial planning fiasco can easily close a company’s doors.
Business financial consultants urge their clients to follow a few basic procedures of good business financial management, such as:
Avoid Undercapitalization
Writing in the business journal Managerial Finance, Paul Dunn and Leo Cheatham explain that undercapitalization is a common cause of small business failure. Undercapitalization refers to any situation in which a business cannot acquire the funds it needs for operation. For instance, an undercapitalized taxi company might not be able to afford fleet repairs.
Dunn and Cheatham have found that many businesses face undercapitalization as a result of a couple of common errors in early business financial planning. Contracting with financial planning consultants is a great way to make sure that you’re accurately predicting business costs. Consultants can also help you create a sound overall financial plan for your business.
Create a Cash Flow Plan
While implementing your business financial management plan, follow a carefully calculated cash flow plan to ensure you can meet your monthly financial obligations. Be diligent in listing your regular expenses – if you forget to include any costs, you will face unexpected (and perhaps unfunded) expenses in the future.
Invoice Clients Weekly
To keep a regular flow of income flying into your coffers, you should review all client accounts and invoice any completed jobs at least once a week. This is also a good time to follow up on any open client accounts.
Pull Financial Reports Monthly
Profit and loss, cash flow projection and other financial reports should be compiled and reviewed once a month. This data will help you ensure that you will have enough coming in to pay your bills on time.
