Unless you run a not-for-profit entity, the point of just about every business is to make money. Ironically, for many businesses, especially small businesses, this is the easy part. The hard part is keeping that money. Between paying vendors, purchasing supplies and materials, paying employees, and even yourself, you may find your balance sheet just breaking even. But is this the best way to do business?
Before we get started, just remember that we are not financial or tax experts, so make sure to speak with your accountant or financial department before making any changes. Well, now that we have that out the way…
Balancing the Books
Unless you are a publicly traded corporation, small businesses often like to zero out at the end of the year to avoid undue taxes. Sadly, it seems that some take that to the extreme and seem to keep a low balance in the bank throughout the year. In fact, a study by JPMorgan Chase concluded that the average small business only has enough cash on hand to cover 27 days of expenses. This can be a dangerous game to play if you want to make any major purchases or if your industry fluctuates seasonally.
Just like in personal finance, experts often suggest having enough cash to cover costs for three to six months. While this seems great in theory, that might be a lot of money depending on what sort of business you have. Many industries, such as construction, often have material bills ten times their payroll amounts or more, which would make the six-month plan almost impossible. So, how can you know what’s reasonable for your business?
Let Your Inner Nerd Lead the Way
Notice how we didn’t tell you there wasn’t any math at the beginning of this article. But don’t worry — we’ll make this as painless as possible. Before you can come to a number, think about your goals or previous experience. For example, if you have a seasonal business, how many months of “excess” do you have verse months of “lean”? If you have a stable workload year-round, do you plan on taking on more employees or want to make major capital investments? For the first scenario, merely take your average monthly inflow minus average outflow and multiply that number by the number of months you want to cover:
[Monthly Inflow – Monthly Outflow] x Months to Cover = How much cash you need on hand
It’s as simple as that!
For the second scenario, just adjust by including the estimated amount you will need for the investment divided by how many months you have to save for it included as part of your monthly costs:
[Monthly Inflow – Monthly Outflow + (Total Investment/Months to Save)] x Months to Cover
A little more complicated, but nothing most people couldn't handle, especially if working with a financial professional. However, to make this easier, you have two options. The obvious option to increase gross income, which is always good. The other option is to lower expenses. What are some easy ways to do that?
Cut Down on Costly Mistakes
In general, the more efficient you are, the lower your costs. But there are hidden costs that many small business owners tend to overlook. We all know that good help is hard to find and not holding on to it can cost you. In order to cut costs, it might seem like a good idea to not pay employees a competitive salary. However, in the long run, this ends up being counterintuitive. How so?
In this job market, the grass sometimes seems greener everywhere else. With the internet, finding those pastures requires very little effort. Having a good employee leave over a few bucks can mean being without their work efforts, and that should generate you much more than what you pay them. Besides, on average, replacing an employee can cost you a third of their salary out of pocket!
Another mistake is not planning ahead when it comes to technology. While many businesses have one or more types of insurance for protection, what arrangements do you have for your computers, servers or other electronics? Think about this: if your system goes down or you need to upgrade, how much are you going to have to spend, both out of pocket plus any downtime this might cause?
Most businesses don’t include this important factor in their budgeting, and, as a result, may get a big hit that will take time to recover from. For this and other reasons, a Managed Service Provider (MSP) is like an insurance policy for your company’s technology needs. An MSP will go over your needs and goals and come up with a monthly plan to make sure that you won’t have any surprises when you have known or unknown technology needs. This gives you the ability to put one more item on your monthly budget and one less thing to keep you up at night.
It’s Totally Worth It
When your business has a reasonable amount of cash on hand, you’ll be able to not only navigate the seas of uncertainty but be able to grow and prosper. With today’s information, take some time to do an honest reflection on where you currently stand and what might be best for your business. To see where we can fit into a plan to increase your liquid cash on hand via an MSP, feel free to contact us directly!