How to Avoid a Common Small Business Mistake

Common Small Business Mistakes

After years of helping clients, we’ve found that the most common small business mistake is poor cash flow management. Cash flow is one of the key financial documents you should monitor and keep up to date. Your accountant can help you. QuickBooks or other software can do it for you. If both make your head spin, we can help you too.

Your business is doing well. But what’s next? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

Why We All Should Care about Small Business Success

Every business has ups and downs when it comes to cash coming in. Customers pay late. Things get delayed. Projects start late. The problem is we all have monthly costs, such as rent, payroll, etc. going out regardless of how much is coming in. That’s what results in people living paycheck to paycheck, or being forced to be overly thrifty with their money. Cash flow management is developing a strategy that creates a buffer so you always have enough to weather these fluctuations.

“[The most common small business mistake] owners make is that they don’t understand their cash forecast, and business can be going very well, but you can run out of money,”

— Karen Mills, the former administrator of the U.S. Small Business Administration (SBA) during President Barack Obama’s presidency in Yahoo Finance

In 2017, small businesses created 1.7 million new jobs. That number rose to 1.9 million in 2018, and another 1.9 million in 2019. There are nearly 31 million small businesses in the US, which employs about ½ of the US workforce. When cash flow falls apart and you face this mistake, your small business is more likely to fall behind. Karen Mills hit the nail on the head when she said that small businesses “…create a path to the American dream, so it’s not only part of the economy, but it’s part of economic mobility.”

How to Manage Cash Flow to Avoid this Common Mistake in your Small Business

Here are four easy tips to learn how to easily combat this mistake in your small business.

1. Know You Average Billing Cycle

What’s a billing cycle? It’s the average time between the date you send an invoice and the date the cash is available in your bank. Available is important because it can take a band 1-2 business days to clear a check. During that time, that cash is NOT available for you to use. Typical billing cycles are between 40-70 days. Cash flow is important for most aspects of business management

2. Keep Enough Cash on Hand

In an ideal world, you would have enough cash on hand to cover your expenses over your average billing cycle. In plain English, you should have enough money in the bank to cover 2 to 3 months of expenses. Now, no one lives in an ideal world, so what can you do?

3. Have a Backup Plan

For many, this takes the form of a line of credit. A line of credit is when a bank agrees to loan you money up to a fixed amount. The interest rate is usually variable, meaning it is set based on the Federal Reserve rate plus some fixed percentage. You would treat this as a regular loan, with TWO major advantages.  First, you take only the amount you need. Second, you can pay it off early

 

Lack of cash on hand always causes problems

First, you take only the amount you need. Second, you can pay it off early without penalties. Most term loans are lump-sum payments. They also tend to carry early payment penalties. This is why lines of credit are much more preferable to loans when dealing with short-term cash flow problems.

4. What to Do if You Can’t Get a Line of Credit

Lines of credit are hard to get. You need stellar personal credit. Plus, you need to be in business for at least 2 if not 3 years. We’ve gone into depth about the challenges you face getting loans and how to avoid them. So if you can’t get a line of credit, your best bet is to get a term loan. It’s not ideal, but it’s better than running out of cash. However, if you don’t qualify for a line of credit, you’re not likely to qualify for a term loan.

We review the alternatives in our post “Denied a Small Business Loan? Try Alternative Lenders”. But always remember, the time to ask for a loan is when you have money in the bank. Don’t wait until you have a cash flow emergency to do it, and NEVER take a merchant cash advance. You’ll only make your problems worse.

In summary…

…to avoid the most common small business mistake, always keep your cash flow forecast up to date. We know that’s more easily said than done, and that it pulls you away from doing what you love. Fortunately, you can turn to us for help.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

Business Credit Score: Why you know yours?

business-credit-score

If you’re like many small business owners, you probably don’t know your business credit score.  Intuitively, you know your business score matters, but you probably don’t know how much it does.

For example, on May 24th the Small Business Administration (SBA) published an article on its blog “5 Major Reasons to Monitor Your Business Credit Reports” by Marco Carbajo

To summarize, your business credit score impacts:

  • How much money you can get
  • The cost of that money (interest rate)
  • How fast you have to pay back that money (cash flow hit)
  • The amount of insurance that you need to have.

These are some pretty important things to highlight because they can negatively or positively impact your business.

Feeling like your business isn’t going the right way? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

How do you get your business credit score?

There are a couple of business credit agencies.  For instance, the most popular is Dun and Bradstreet (D&B).  If you use D&B, they will allow you to view your business credit report and update it on-line via iUpdate.

What should you do if you don’t have a file?

When you go to these sites, you may find that you don’t have a file.  For all reasons stated above, you probably want one. Therefore, you can start establishing your business credit score. 

It’s relatively easy to sign up.  But, it can take time. For example, if you use D&B, you will need to register for a DUNS number.  This can take up to 30 days.  Once you have that number, you can manually update your data.

Why monitor your business credit score?

Mr. Carbajo shares his five key reasons for monitoring your business credit report. Certainly, all are important:

First, ensure your company’s business credit report is complete and accurate. Second, stay notified on any changes to your report that could impact your business. Third, identity any issues or areas in your business credit report that can be improved upon. Next, be aware of who is inquiring about your business (inquiries). Finally, prevent identity theft by monitoring inquiries into your report

What if your file has inaccurate information?

As with your personal credit, it is important to dispute any inaccurate information.  For instance, some agencies have alerts you can sign-up for that will send you notifications of any score changes.  Thus, it makes monitoring your report much easier.  Since the work is on you, the set-up is a bit of a pain. But, it’s worth it. Because once it’s done, monitoring your business credit score is not as burdensome as you may think.

Why go through all this trouble to manage your business credit score? 

In other words, you spend a lot of time and effort in managing your business’ reputation.  Your credit score is a manifestation of that reputation to creditors.  We spend of lot of time and energy managing our reputation to other audiences. So, why wouldn’t we apply that same rigor with our creditors?

In closing, if this is a bit confusing or tricky and you need some help, please feel free to contact us.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.