Greg Jones knows the challenges of managing working capital. As the CEO of BookKeeping Express, a Tysons Corner, Virginia-based bookkeeping services franchise, Jones helps businesses large and small manage their cash flow and overcome money crunches. But Jones is also the owner of five franchise locations of Five Guys Burgers & Fries—a role that requires him to maintain his own operating cash flow best practices.
To be sure, managing cash flow is never easy. Small businesses need money on hand for expenses and to purchase needed assets. At the same time, delinquent accounts, shoddy inventory, accounts payable problems, and poor credit can stand in the way of small businesses maintaining sufficient working capital.
“Not having enough capital to run your business has always been the number one reason for failure,” says Jones.
Luckily, Jones shares his top six recommendations, gleaned from both his experience counseling other small businesses and from running his own company, on how to make the most of working capital, especially in tight times.
Prudent to a fault. Running a company as frugally as possible might seem like a necessity, but it could end up starving it of the fuel it needs for future success, warns Jones. “A lot of business owners try to run a business operation as lean as possible but then they quickly find out that there’s much more they need to grow,” he says. “Then they look at their capital and their cash flow situation and end up floundering or going backwards.” For example, Jones says many growing companies eschew pricey accounting software for Excel spreadsheets and paper-based ledgers. However, investing in cost-effective, Web-based accounting programs is an excellent way to avoid accounting errors without breaking the bank.
Create a budget. Whether you’re applying for a bank loan or predicting this month’s sales, a business plan is key to making an accurate determination of your operating cash flow. “The beginning of the process is where a lot of people falter,” says Jones. “So it’s all about planning and strategizing prior to starting your business.”
Get help. The owner of a barber shop is probably a terrific hair stylist. But does he necessarily have the time to reconcile his check book each week or month? Probably not, says Jones. That’s all the more reason for entrepreneurs to seek the assistance of a professional accountant or certified financial planner to help create an operating cash flow plan. “You have to have somebody, an outsourced party, sit down with you and bring a realistic view of your cash flow situation,” Jones says.
Know your numbers. Have you ever stared at a bill from your credit card company, too afraid to open up the envelope and read what’s inside? Turning a blind eye to the amount of money entering the company, and the amount that’s leaving, however, is a recipe for disaster, warns Jones. “A lot of people will avoid sitting down and looking at their finances,” says Jones. “Every Monday morning I sit down with my finance guy and I go through all the numbers. I make it a priority. That’s because if you have more going out than coming in, you’re in trouble. You need to get the whole picture.”
Sock it away wisely. Part of maintaining a positive cash flow is determining how much needs to be funnelled back into the company to ensure continued growth. ”Find out what your operating expenses will be in the 60 or 90 days and what you have left to play with,” advises Jones. The next step is to invest that remaining amount of money as sensibly and wisely as possible. For example, Jones says that if you can afford to sock away 10 percent of your revenue, it might be worth opening a Money Market Fund or a similar savings account. Just remember: “I wouldn’t tie up my money in a long-term fixed strategy. You always want to be able to get to your cash quickly. I wouldn’t lock it down for longer than 6 or 12 months.”
Don’t count your chickens. So you’re 99.9-percent positive you’ve landed a huge government contract but won’t know for another month or so. That’s great, but small businesses should never be too sure positive about something happening until the deal is done or the contract is signed, says Jones. Purchasing assets or expanding your business based on assumptions can have a disastrous impact on a growing company’s working capital. That’s because if your hoped-for plan falls through, “you’re sitting there stuck,” says Jones. “You can’t estimate your cash flow until the deal is done.”