Why Ignoring Cash Flow Can Kill Your Small Business

Businesses face many hurdles, especially when just getting started, and cash flow is near the top of the list. Even for profitable companies, it can be a challenge to make sure that more money is coming in every month than is going out. Inventory, accounts receivable, vendor contracts and payroll all must be managed effectively so companies don’t lose out on needed investment and growth due to a shortage of working capital.

We asked Jeremy Office, a Delray Beach, Florida-based wealth advisor to entrepreneurs and a member of NerdWallet’s Ask an Advisor network, about ways business owners can control their cash flow and grow their businesses.

Why is managing cash flow important for small businesses?

Managing cash flow is the determining factor of whether a business succeeds. Statistics show upward of 50% of businesses fail. In many cases, these are profitable businesses, but they close their doors due to poor cash flow management. While the primary concerns are obvious, such as meeting payroll or paying a supplier, it’s the ripple and compounding effects of consistently poor cash flow management that can be truly damaging.

Here’s an all-too-common scenario: Bob’s Dry Cleaning is a profitable business, so Bob decides to make a down payment on a new piece of equipment. He doesn’t pay attention to cash flow, however, and the money he spent on the equipment was needed for payroll that week. He doesn’t have the cash and fails to meet payroll (this wasn’t the first time), so his pickup/delivery driver quits. Bob is in a panic and shifts his focus to pickup/delivery to fill the void while also trying to find a new driver. Bob doesn’t have time to call other accounts to collect receivables in a timely fashion, so a couple more payments are delayed.

Meanwhile, Bob’s biggest client is unhappy because his deliveries are delayed, and he decides to find a different vendor. The next payroll cycle arrives, and it’s twice as big now. At the same time, rent is also due, and Bob has a new payment owed on the equipment purchase he made. Bob can’t go two cycles without paying his employees, so now Bob’s time is spent managing late payments to his landlord and equipment vendor and assuring them he’ll pay ASAP.

Bob is frantically trying to understand who owes him money and calling them to get paid. He has no time to focus on getting new accounts, so his sales start dropping. Bob starts losing clients because the delivery driver he hired out of desperation hasn’t had the proper training and mixes everyone’s clothes up. Before Bob knows it, he is consumed by his business and doesn’t know what to focus on. His once-profitable business is now on the verge of closing its doors because he no longer has the revenue to support his monthly burn.

A small business that needs to implement a new strategy — for example, increasing inventory for the holidays, hiring new employees, implementing new technology or buying new equipment — can do so faster and have conviction in its decision if it understands the repercussions and plans for the cash flow impact. Cash crunches are inevitable for a small business, but it is much easier to overcome when the business anticipates and has ample time to find a resolution.

What should small-business owners keep in mind to most accurately calculate cash flow?

They should stay focused on actual rather than hypothetical data. Small-business owners often make decisions based on the expectation of receiving cash in the future, and when that doesn’t happen, it can put them in a cash crunch. This isn’t to say you shouldn’t account for future receipts (as this is important in modeling cash flow), but rather you should be realistic as to when such receipts will be received. If an invoice owed to you is due in 30 days but the customer has always paid 15 days late, you should account for the additional delay when projecting cash flow.

It’s important that small-business owners continually monitor their cash flow process to ensure their expectations are in line with what actually happens. This will help build conviction and reliance upon the process.

What are some simple tools small businesses can use to track their cash flow?

Tools for managing cash flow are abundant and vary based on the information needed, technical expertise required and level of automation. Various websites dedicated to small business, along with well-known business applications such as Microsoft Office and Google Docs, have created standardized templates that can be downloaded for free. In recent years, there have been various software platforms and applications that have surfaced to help manage cash flow. A simple Google search will yield a multitude of platforms, including Pulse, Float and Up Your Cash Flow. And many of the leading accounting programs have started incorporating cash flow management tools (for example, QuickBooks’ cash flow forecast report).

Each option has its own strengths and weaknesses, and a small business should base its decision on the tool that it finds most efficient. A tool is only beneficial if the information it provides leads to actionable results, so if a small business finds that a tool is too complex or it is not able to pull beneficial information, the owner should look for another solution.

In general, it’s a good idea to hire an independent consultant to establish the framework and teach the business owner how to utilize cash flow. This provides a resource to call with questions and leads to a deeper understanding.

Jeremy Office is a wealth advisor to entrepreneurs and principal of Maclendon Wealth Management, based in Delray Beach, Fla.

The article Why Ignoring Cash Flow Can Kill Your Small Business originally appeared on NerdWallet.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Read more: http://www.nasdaq.com/article/why-ignoring-cash-flow-can-kill-your-small-business-cm622838#ixzz49B1iRhea

A Beginner's Guide to Freelancing

More than one in three American workers are setting their own hours and working from home or cafes while still contributing to companies large and small on a consistent basis. Yes, freelance or contract employees are here, and they're here to stay, given that technology increasingly allows us all to work together without being together. Freelancing, meanwhile, can be a job all its own, and is often devoid of collaboration. For those of you considering going this route, consider our beginner's guide before going it alone.

Starting: Making Connections and Getting Hired

The first step toward becoming a successful freelancer is to create your identity online. "Build your brand," a phrase you'll hear often in this space, starts with creating an online portfolio to show potential employers what kind of work you have executed in the past and, perhaps, to show some of your personality. To do this, consider using a website-building tool like Wordpress or Squarespace. Furthermore, completing and updating your LinkedIn profile -- and building a following on social media (i.e. Twitter, Facebook) -- will help give employers context as to who you are and what you're capable of doing.

Next, build your address book and reach out to every contact with whom your name carries weight. Tell your friends, peers, past colleagues about your new venture and ask them for advice; it's a nice, veiled way of asking for work. (Example: If you're a freelance writer, email your old student newspaper colleagues or any editors that you worked with previously.) This strategy will only get you so far, so the ensuing step will be to join online communities connecting freelancers with hiring companies. Websites like UpWork, WorkMarket, Elance will connect you with people you don't already know. Once you're logged on, you'll be able to scan job listings and submit applications. This is really the key at this early stage: Foster existing relationships and go about creating new, fruitful ones. You never know who might be the first person to offer you a gig.

Beyond interacting with people with the power to give your work, rub elbows with your competition. Read up on the market for freelancers within your field, whether it's graphic design or accounting. The Freelancers Union, one such group, covers professionals of all types, and other organizations exist for freelancers with a specific niche. (If you're a freelance writer, check out the Editorial Freelancers Association and the Society of Professional Journalists Freelance Community, for example.)

Optimizing: Scheduling -- and Valuing -- Your Time

Once the online version of you has been created and you've been connecting with actual people online or off, it will be time to get into the actual practice of being a freelancer. The truth is that it's one part salesman, one part project manager, one part tradesman and one part bookeeper. Whether you're responding to freelance opportunities or pitching your own ideas to companies, you'll have to gain the skill of selling yourself. To do this, figure out the overlap between your overall skillset and the void existing at the company or companies that you're targeting. Tailor your pitch to them with this venn diagram in mind. Oh, and never say no to an assignment. At this stage, you can't afford to. All work is good work. Be available for it, accept feedback and strike a balance between being communicative and being autonomous and resourceful.

Now that you've had an attitude adjustment, you need to streamline your workflow. Enter the project manager. Some specific advice: Without losing a personal touch in your dealings with employers, build a template for everything you'll be doing, from pitches to invoices; tools like Harvest, FreshBooks and Zoho Books can help with the bookeeping aspect of your job. Back to managing your time: Build a schedule for yourself and your work, which will push you into a daily routine and allow you to find your creative zone. No longer stuck in the 9-to-5 mindset, you might find yourself the most productive from 12 to 8 p.m., for example. There are many free online tools to accomplish this, but something like Google Calendar, with its ability to remind you of deadlines, should suffice while you're starting out. During this process, track every assignment, how much time you spent on and how much you earned from it. Having this list, however informal, will remind you to evaluate the worth of each assignment and to strive for more challenging -- and, ideally, lucrative -- work over time.

Financing: Getting Paid and Paying Taxes

OK, so now you're a pro, and you can pick and choose which assignments you'd like to take on. With each potential assignment, whether it originates from you or the employer, figure out if it's worth your time. Perhaps, when getting started, you completed a project for a non-profit organization free of charge, just to add to your portfolio. Now you can afford to weigh its financial value. The simplest way to do this is to estimate the number of hours it will take you to complete and then apply a "market rate" to that number of hours. Go through this practice even if the employer wants to pay you a flat fee. Figuring out the hourly cost will help you determine if their suggested fee is a fair one or not; if not, you can explain your formula in the course of your negotiations for a higher one.

What is the market rate? Besides asking straight out, there are myriad ways to figure out what your peers are earning for similar work. For example, Contently.net maintains a rates database and Whopayswriters.com has a similar trove of user-supplier data for scribes specifically. Keep in mind that not all hiring companies have an established rate or even expectation. Your ability to explain to them why you should be paid how much you're asking for goes a long way toward actually being able to get it. Beyond "market rate" pricing, as described above, there are two more ways to quote or estimate a project fee. Firstly, consider the costs to you first and foremost -- perhaps long-distance phone calls, buying software or meals and hotel stays -- and then tack on a a sufficient profit. A second option: Consider the value of the project to the company. In other words, one project completed for a multi-billion-dollar corporation should pay more than a 12-person startup company would. It almost goes without saying, but you should be more earning more than the nationally proposed $15 per hour minimum wage.

The salesman in you can rest now. Time for the bookeeper to take over. You don't have to become an actuary to do this right, but there are two important financial issues to consider for full-time freelancers: taxes and health insurance. As for the latter, open up a separate savings account and put aside a percentage of each check; after all, your local, state and federal taxes won't be taken out until the springtime. Additionally, track your expenses for the purposes of deduction, whether you invest in a new office chair for your desk at home or have to travel for an assignment. You could go so far as to set up an LLC to keep your personal and business expenses completely separate. As for the benefits you would forfeit by forgoing full-time work, just because you're going it alone at work doesn't mean there isn't a health insurance product that fits your needs.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Read more: http://www.nasdaq.com/article/a-beginners-guide-to-freelancing-cm623430#ixzz49B1MFWnm

Business News

You’ve come up with an idea for a product or service, identified a target market and decided to start your small business. Congratulations on pursuing your dream! Now comes the hard part — long months spent building a business, one customer at a time. The first year of a small business’s existence is crucial, as entrepreneurs run headlong into critical questions. What should I be focusing on? Where should I turn for financing? And what are the pitfalls to watch out for? We asked members of NerdWallet’s Ask an Advisor network about ways business owners can get off to a good start with their entrepreneurial dreams. What are the key factors small businesses should think about in the first year? RITA CHENG, FINANCIAL ADVISOR IN ROCKVILLE, MARYLAND Prior to and in the beginning stages of launching your venture, there are a few key things you should do: Consult with a certified financial planner to make sure you have the proper insurance in place. Consult with a tax advisor to make sure that you have the correct structure for your business (for example, sole proprietorship, S corporation or limited liability company). Maintain good records. Do not commingle personal expenses with business expenses. Focus on cash flow and building client relationships. Manage excessive or insufficient inventory. Monitor your accounts receivable, because uncollected receivables hamper your business’s growth and could result in cash flow management problems. Manage your working capital, which is defined as current assets less current liabilities. Without sufficient working capital, you will not be able to stay in business. JEREMY OFFICE, DELRAY BEACH, FLORIDA-BASED WEALTH ADVISOR TO ENTREPRENEURS The most important factor should always be the quality of the product or service. In focusing on delivering the highest-quality product or service, it’s imperative to manage the staging of revenue and investment early in the life cycle. If a company loses sight of delivering its product to market in ample time to generate sufficient revenue to meet obligations, there can be significant consequences, and the future of the business could be at jeopardy. Also, businesses should be aware of their timeline so they know the ripple effects of failing to meet hurdles. This allows them to make strategic shifts, such as financing or ancillary product launches, to ensure they have the necessary resources to meet their objectives. Ultimately, the goal is delivering the best product or service, and the process should be focused around sustainability. ANNA SERGUNINA, FINANCIAL ADVISOR IN WASHINGTON, D.C. In the first year, it’s hard to see far, therefore focus on bringing in as much revenue as possible. And keep expenses lean — this will circle back when you start thinking about raising capital. What are some of the options for raising financing at this early stage? What are some of the advantages and disadvantages of these options? Jeremy Office: One option is self-funding — using your personal savings, as well as leveraging assets or grants. The advantages are that you’re not beholden to outside investors, you retain 100% ownership, and the timing can be fast. The disadvantage is that all the risk is on you, and you can potentially lose your life savings and assets. Businesses can also tap outside money — angel funding, venture capital and private equity funding, and banks and other institutional investors and lenders. The advantages are that you can align with “smart” money, outside investor accountability can be a positive, and there are massive amounts of available funds. The disadvantages are that it can be a difficult process, terms can be less than favorable, it’s time-consuming and expensive, and accountability can also be a negative. Rita Cheng: Outside investment is an option, but you can reduce or diminish your own control and influence if you accept money from investors too early. Angel investors or venture capitalists may want to have a large share in their invested company as well as have a say in every business decision, including routine ones. New business owners can also access financial capital through debt financing. Business loans can offer business owners exactly what they value: the essential financial capital to launch their new businesses. Anna Sergunina: As for getting financing from friends and family, this might create unnecessary tension in the family if something goes wrong. Think about future Thanksgiving dinners! But you could also create a positive outcome and allow for the business to stay in the family. Another option is strategic partnerships. Consider finding another business that supports your business idea and offers a complementary product or service. Offer it a small share in your business. This will provide exposure to its network of clients and will help build credibility for your brand and business faster. How can business owners determine how much they should raise? Anna Sergunina: It will depend on how much expansion is anticipated and how fast you want to grow. Project fixed and variable costs for six to 12 months out. Factor in your sales cycle (how long it takes to sell your product or service) to determine how much capital you will need to support it. Jeremy Office: Start with the total budget needed to get the business to sustainable cash flow. From there, you should look at the various milestones the business will need to accomplish (for example, conception, prototype, beta testing and market acceptance) and determine how much money is needed for each stage. For startups backed by outside investors, the earlier the stage, the more equity the business will be giving away; thus the owner should determine the amount of capital needed to get to the next stage that justifies a significant increase in valuation. Business owners should raise that amount with a comfortable cushion. This way you preserve equity for stakeholders while also mitigating risk as you accomplish needed objectives. Rita Cheng: Seek the guidance of professionals in this area. There can be multiple rounds of financing if a business is going to be successful. The challenge is sometimes getting caught in raising the money, then forgetting about the business. Every company’s situation is unique and must be evaluated independently. What kind of cash flow analysis might be helpful in this situation? Rita Cheng: Cash flow has two components: inflow from the sale of goods and services or proceeds from loans or lines of credit, and outflow attributed to business expenditures, loan payments and business purchases. The maxim “Cash is king” holds true. Business owners need cash to create, manage and expand their business. However, despite its importance, many small-business owners experience challenges in understanding and managing their cash flow. Inaccurate cash flow analysis can affect the day-to-day operations of a business, as well as the ability for a business to beapproved for a loan. Anna Sergunina: Figure out your cash burn — how much cash you’re going through within a specific period of time. This will help you determine what your needs are for how much needs to be raised. Also, this should help point out unnecessary expenses and what could be cut or reduced. Jeremy Office: It’s important to project cash flows and consistently monitor against such projection. The business owner must focus on actively modifying the projections as production or delivery timelines change. Too often, businesses delay product launches without considering the impact to their cash flow. Taking a proactive approach to constrained cash flow is the best method to ensure you make it through. Read more: http://www.nasdaq.com/article/what-business-owners-should-think-about-in-the-first-year-cm623544#ixzz49B1AWPP8