By Kala Gibson
As we approach the fourth quarter of 2015, now is a great time for small business owners to dive into their financials and begin thinking about 2016 annual goals. Start by reviewing revenues and expenses from last quarter: Are your revenues growing enough to support your expenses? Can you boost one and reduce the other?
Use these tips to help make 2016 a banner year:
Stay on top of the numbers. Entrepreneurs sometimes get so focused on sales and operations that they don’t have a good handle on their finances. Don’t turn everything over to your accountant and expect him to tell you how your company is doing once a year. As a business owner, you should know how much cash is coming in every month, how much you’re paying in fixed and variable expenses and what profit you’re clearing. If your company isn’t as profitable as it should be, take steps quickly to boost prices or cut expenses.
Focus on receivables. Many small businesses have poor cash flow due to a constant backlog of slow-paying or non-paying accounts. Take steps to decrease your collection time, including establishing electronic banking to speed up the process. Institute 30-day collection cycles with interest accruing on late payments, if possible. You can also offer small discounts — say 2 percent — for customers who pay up within 10 days of invoicing. Examine your payment records to identify slow-paying customers and contact them to work out a payment schedule. If you have customers who consistently pay late or not at all, consider declining future credit to them.
Reevaluate your payments. Many small business owners can improve cash flow by making their own payments on the date they are due, rather than as soon as an invoice is received. If you are paying your suppliers early, ask them to consider giving you a discount. You may also get volume discounts if you buy inventory and supplies from one vendor or a limited number of vendors. Your goal: Keep cash on your balance sheet as long as possible, while still ensuring that your bills are paid in timely fashion.
Change your pricing. Most small businesses cannot succeed in the long run if they are competing on price. Larger companies can always charge less and make up for it by increased sales volume. What you can deliver is superior service and unique products for which customers will be willing to pay more. Figure your time and your company’s overhead (including labor, marketing and fixed costs) into your product pricing or your hourly rate, if you’re running a service business. Make your value clear in your marketing and advertising to justify your higher pricing to would-be customers.
Set aside adequate reserves. It’s best to keep a minimum of six to eight months’ worth of working capital on hand so you can get through unexpected downturns or seasonal sales fluctuations without putting your business at risk. While this may seem difficult to set aside, the cost of not having this capital in place when a crunch hits can have dramatic, long-lasting effects. Use this reality to motivate you. Put the reserve fund in a short-term certificate of deposit or money market fund where it won’t be vulnerable, and tap into it when you need additional cash for emergencies or unanticipated setbacks.
Kala Gibson is the senior vice president and head of business banking for Fifth Third Bank. Stay connected at @FifthThird. Fifth Third does not provide legal or tax advice. This information is provided for educational purposes only and is subject to change. Fifth Third Bank. Member FDIC.