Cash Flow Planning for Solopreneurs
You’ve heard it a million times – cash flow can make or break a business. Lack of cash flow planning causes many businesses to fail, even profitable ones. Without adequate cash flow, you can’t pay your bills and you can’t grow your business.
So, what is cash flow planning? It’s projecting your future cash inflow from sales, services, and loans, and comparing them to your future estimated costs (suppliers, salaries/wages, loan payments, taxes, etc.). The difference between the two is your net cash flow.
Why is cash flow planning so important? Cash flow planning can help you identify problems down the road, and fix them before they occur. Cash flow planning can also help you make decisions such as: should I attend that conference? Should I buy the new computer I’ve been wanting? Or: do I need to work extra hard this month to avoid a cash flow deficiency next month?
The first step in planning your cash flow is knowing how you spend your money. Solo entrepreneurs need to have a good grip on both their personal and business spending, as most of them rely on the business’ income to meet personal finance goals (i.e., pay the bills!).
You should project your spending for at least the next 12 months, being sure to include annual and other periodic expenses. If you are an established business, you can project your cash flow for the next year by reviewing your expenses for last year. If you are a new business, you will need to estimate your start-up costs in addition to regular operating expenses.
Start-up costs include inventory, legal expenses, advertising, licenses and permits, supplies, and possibly other costs that you may not have thought of. For help estimating start-up costs, contact your local Small Business Development Center or a SCORE counselor, join groups of other small business owners, and read as many books or articles you can find on the subject.
Create best and worst case scenarios and appropriate responses to each. For example, if your best-case scenario is to increase sales by 50%, how will you use the profits? Will you put the profits back into the company by investing in new equipment, training, etc.? If your worst-case scenario is a 50% drop in sales, how will you continue to cover your monthly expenses? By planning for the best and the worst, you’ll be ready for any situation.
When estimating your future income, realize that some people will pay late, and account for that fact in your projection.
Charge what you’re worth. Many businesses, especially service professionals, under-charge when they are first starting out. This is a great way to go out of business. Make sure you are charging what you’re worth, and remember that you’re in business to make money, not to give your expertise away for free.
Watch your business spending, and don’t hire until necessary. Consider using virtual assistants or temporary employees before hiring permanent ones.
Give incentives for early payment for products and services. On the flip side, chase down invoices the minute they’re late. Charge interest or late fees to encourage timely payments.
Update your cash flow plan regularly, as it will change frequently as your business grows. Remember: whether you are a new or growing business, your cash flow projection can make the difference between success and failure.
Need help with cash flow planning? Pamela Finnesand, The Business Maximizer can assist you! Schedule your complimentary Business Breakthrough Strategy Session today.
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