By Devon Johnson, WEV Director of Lending
Talking (and thinking) about money is often uncomfortable, but it’s necessary to maintain a healthy business. Below are a few tips to get you thinking about money, your finances, and how not to be an ostrich.
1. Cash is queen. Others may say cash is king, but at WEV we think cash is queen. What we mean is this: before making purchases that will require additional debt or use up a large amount cash, think carefully and ask yourself if that new item will eventually generate the cash flow needed to pay for itself.
Here’s a real example: a WEV client was washing kitchen equipment by hand which was extremely time and labor intensive due to the type of equipment and how frequently it needed washing. The time spent washing was time taken away from baking. With a commercial washer, the owner would be freed up to create and sell more product, and make more money. After careful analysis, she determined that the money made from additional sales would be greater than the monthly loan payment on the washer. The purchase allowed the owner to spend more time doing what she loves and her business made more money!
This concept applies in other situations as well. For instance, would investing in a marketing campaign or hiring an employee increase sales? If so, would the increase eventually exceed the expense? If the answer is yes, these could be wise investments. But if taking on debt or spending your cash cushion on these items won’t generate enough cash over a reasonable amount of time (a good rule of thumb is 6-12 months), consider deferring the expense.
2. Make a plan. Develop a financial roadmap by creating a budget for all business income and expenses. A budget helps you maintain the direction of the business, but only if it is reviewed and updated frequently. You should also have a budget for personal expenses. Many small business owners don’t track their personal expenses and as a result business resources are drained without being noticed.
3. Don’t be an ostrich. Deal with financial problems immediately! Burying your head in the sand will never solve the problem and will definitely make it worse. Be proactive – especially with cash flow issues. You can avoid serious financial problems by identifying and addressing them early. Talk to your banker, your bookkeeper, or an expert in business financials – such as a consultant from the Small Business Development Center, SCORE or a Business Development Specialist from WEV’s Thrive program. Though discussing financial difficulties may be uncomfortable, many problems are best resolved by a team. Create a personal board of directors or an advisory board, comprised of people you know and respect, who can offer insight and advice. Make sure your banker or someone with financial expertise is a member.
Creating a healthy relationship with your finances is the same as any other relationship – it requires attention, conversation, and quality time.