Is Your Business Cyclical? Short Answer: 100% Yes.
Welcome to part three of our New Year’s Business Resolution series! Last week, we discussed looking at evaluating your staff; Your next resolution is taking a step a bit more into the nitty gritty of operating your business: managing cash flow.
Does your business have ebbs and flows, up seasons and down seasons? Before you respond, here’s what your answer should be: yes.
While some businesses are seasonal by design - like a surf shop in a climate that gets cold in the wintertime - every business is cyclical. While the surf shop on Long Island might be able to plan for it (they know that they’ll do most of their business during the summer months, and maybe consider closing in the winter), the ebbs and flows of other businesses might not be so black and white. That’s why cash flow is so important.
Most small businesses are cash poor when they start. That’s fine, and it’s normal. You need to be able to turn your idea into a business and that business into a profit - doing that takes time and money.
But at a certain point, you’ll need to be able to establish a cash cushion, and a create a system for managing cash flow. You don’t want your business entirely dependent on what’s left in the cash register at the end of each night.
In the new year, after you’ve looked over your business plan, look over how you managed your cash flow over the previous year. Maybe there are vendor or supplier deals that need to be reconsidered or reconfigured to open up a little more cash.
Take a look at your books for the past year and ask yourself some important questions:
Are there some loans or debt you owe that you might want to consider refinancing?
What is your accounts receivable turnover ratio?
Is your client base paying in full in a timely fashion?
Or is it pulling teeth trying to get even a percentage of the invoice paid?
If there are areas of issue here, you might want to look into what your payment policies are. Perhaps require a certain amount up front, or stiffen up your collection policies. Small business sometimes are either too lenient, leading to cash flow problems; or too strict, turning away good potential long-term customers and clients. Look into how successful your system is working and evaluate how it can be better in the new year.
Remember that cash flow and turning a profit are closely tied, but mutually exclusive. Figure out where your money is, where it’s going, and how quickly it’s coming in. Make it a point to do it now, before it gets out of hand. Poor cash management can quickly undo a business - even businesses that are highly profitable!