Why Operating Cash Flow is Important for Small Businesses

Every business, no matter how large or small it may be, depends on its cash flow. Cash is the most important business asset because it’s the most liquid asset as well. Having cash means you can pay for every expense immediately. It also means you can make investments when an opportunity presents itself. Without cash, a company would start having financial difficulties and eventually go bankrupt, even if that same company is generating good revenue and profits.

That’s why cash is considered king in the business world, at least from a financial point of view. It’s of the utmost importance for companies to track their operating cash flow. Operating cash flow is cash generated by a company’s everyday operations and not the cash gained from external resources, such as private reserves or investor funds. In other words, the cash a company can generate in order to sustain its business operations. Here are a few reasons why operating cash flow is important for small businesses.

Business liquidity

A company’s liquidity determines its chances of long-term success. Basically, what liquidity means is the ability of a company to cover its immediate and short-term liabilities, i.e. its obligations or debts using its own assets. The liquidity ratio is determined by a company’s ability to pay its dues on time within a one-year time span. That’s where cash flow and cash-on-hand come into play. To calculate the ratio, companies must assess their liquid assets. The number of liquid assets a company possesses can usually be found in their balance sheet.

For instance, an emergency savings account is considered a liquid asset. Simply put, how fast can you turn your asset into cash determines the liquidity of an asset, and since a savings account is basically cash stored up, it’s one of the most liquid assets a company has. On the other hand, a building is also a liquid asset, but it takes time to sell it and turn it into cash. What’s more, you can rarely get the right price quickly for the building’s true worth, which means this asset is less liquid than the cash itself.

Balancing the cash flow

Positive cash flow is crucial for companies. It means you have more money coming in from accounts receivable than going out through accounts payable. However, too much cash can be almost as bad as not having enough cash. Primarily because if you have a surplus of cash, it means your company is missing out on potential investment opportunities where it can generate even more income and profit.

On the other hand, lacking cash means your company is most likely unable to collect payments from clients or customers on time. That can be solved by implementing a direct debit system for your recurring incoming payments and repeat customers, which will automatically collect funds. In other words, you balance the cash flow by ensuring payments are collected on time and surplus funds are invested wisely.. However, you cannot do that if you don’t track your operating cash flow.

Avoiding a financial crisis

As mentioned before, companies that generate good revenue can still go bankrupt without a positive cash flow. As you already know, cash is the most liquid asset. That means that you can use it to pay urgent expenses, such as bills, taxes, salaries and so on. However, a lot of small business owners confuse revenue and profits with cash, which is a huge mistake.

  • Revenue is a total sum of money your company has obtained by conducting business operations over a specific period of time. Simply put, revenue is the entire income of your company, which was generated from sources such as sales, borrowed capital and interest rates among other things.
  • On the other hand, your profit is the total sum of money your company has after you subtract your business expenses, i.e. operating costs and taxes from your total revenue. That profit is also called Net Profit.

Revenue nor profit is actual cash.

For instance, payments from invoices are considered sales profits and revenue but you don’t get cash until invoices are due, which is anywhere between 30 and 120 days. Conversely, you still have expenses to pay during that time, such as salaries and bills but you can’t do that without cash, which means you either find funds elsewhere or declare bankruptcy. That’s an example of going bankrupt even when your company generates revenue.

Operating cash flow is essential for small business success, as well as for financial stability. Having positive operating cash flow means your company is self-sustainable. In other words, your revenue, profits and cash can maintain optimal business operations without you having to pour external funds into your company, such as taking out a loan or asking an investor for financial aid.

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3 Key Challenges in Accounting and Finance Recruiting (and How to Tackle Them)

Learn how to tackle 3 key challenges in accounting and finance recruiting!

3 Key Challenges in Accounting and Finance Recruiting (and How to Tackle Them).jpg

Changes in accounting and finance recruiting

Accounting and finance recruiting is a term used for finding and hiring the right job candidates in the accounting and finance industry sector.

Accounting and finance sector has been going through some major changes lately.

If you want to be successful in recruiting accounting and finance professionals, you have to stay up to date on accounting and finance employment trends and challenges.

3 key challenges in retail recruiting (and how to tackle them)

Recruiting the right people for an accounting and finance jobs can be a challenging task. However, if you leverage the latest innovations in recruiting, you can recruit finance and accounting professionals much easier and faster.

Here are the 3 key challenges in accounting and finance recruiting:

Accounting and finance recruiting challenge #1: Talent shortage

According to the Bureau of Labor Statistics, the unemployment rate for accounting and financial sector at 2.2%, which is even lower than the overall national unemployment rate of 4.9 percent.

As a result, many studies (such as recent survey by Accounting Today or another by Robert Half) report on difficulties with finding accounting and recruiting candidates. According to recruitment consultants Hays, 76% of accountancy and finance employers said their top challenge is a shortage of suitable applicants.

How to tackle this challenge?

Differentiate your employer brand in order to stand out among your competitors and attract the attention of the scarce talent. Don’t be afraid be different and even break the rules! Change the stereotypes of the finance and accounting sector and boring and conservative.

Take a look at the example of a The Motley Fool, a financial services firm who decided to break free from the buttoned-up image of its industry. This company’s “foolish” culture became their recruiting powerhouse – even in a time of talent shortage!

Accounting and finance recruiting challenge #2: Attracting candidates with the right skills

Advances in technology are changing the accounting and financial job positions and its requirements. As a result, companies are requiring accounting and financial candidates who can do more than just crunch numbers. They want people with technology and people skills in order to have the ability to change and evolve with the times.

Research by recruitment firm Robert Half has indicated that 89% of chief financial officers in Australia struggle to find skilled finance staff, primarily due to a lack of professionals with the required niche and technical skillset.

How to tackle this challenge?

Write great job descriptions for accounting and finance positions you need to fill. Make sure you highlight the technical and niche skills and experience you are looking for in your ideal accounting and finance employees!
During the interview, ask the best interview questions to assess candidates personality and culture fit.

A good way to assess candidates knowledge and skills is to present them with a work sample test. Give your candidates a short task similar to the one they would perform at the job.

Accounting and finance recruiting challenge #3: Attracting millennial employees

The salient challenge in accounting and finance recruiting is attracting younger members of the workforce.

A recent survey by the Institute of Management Accountants found that 62% of senior finance professionals believe that recruiting millennials is the biggest challenge for their business!

According to Upskilled report, accounting and financial professionals under 25 years make up for only 8% of total accounting and finance employees!

How to tackle this challenge?

Set up an employee referral program and ask their existing employees to recommend suitable finance and accounting professionals that would make great candidates. According to the Institute of Management Accountants survey, the recruiting practice that has been most successful in recruiting millennials for finance jobs is employee referrals!

Another way to reach millennials is to advertise your open job positions on social media! Instead of posting a classical job description with a list of duties, provide a candidate with a glimpse into your company culture. Here is a great example of Twitter job post published by UK accounting firm My Accountancy Place.

 

Moving Forward After Funding Failure

One of the toughest things about starting or sustaining a business is finding funding. Whether for a startup effort, an expansion, product development, or more aggressive marketing, every business needs money, and many times that means outside funding. There are a few ways to get outside money for your business:

  • Traditional Business Loans: Available from banks, credit unions, or small business administration and government loans, these are traditional ways of funding. Essentially, a business takes out a secured or unsecured loan and pays it back in installments with interest.
  • Venture Capital/Angel Investors: This funding comes from individuals or groups who invest in businesses in exchange for a percentage of profits and a portion of the proceeds if the business is sold or stock options if it goes public.
  • Crowdfunding: A relatively new method for business, this is when you use platforms like Kickstarter to get funding from those who are interested in your product or service.
  • IPO: When a company sells stock that is publicly traded.

There are other methods of internal funding and less conventional funding like seeking loans from friends and family. Essentially, for all of these different methods, you must prove that your business has either made money in the past or has the potential to make enough money to be worth investors’ time and money.

None of these methods of funding are guaranteed. So what happens when you go after funding and you don’t get it? Here are some keys to moving forward after funding failure:

Evaluate What Went Wrong (If Anything)

Depending on the type of funding you were seeking, there could be a number of reasons you did not get it. It is a good idea at this point for you to see the same issues lenders saw so you can fix them if possible. If it is not possible to fix the issue, then you might have to reconsider your growth rate or even your business idea. Here are a few things that could have gone wrong:

  • Your Personal Credit Score Is Too Low: When your startup is new, your business has no credit rating of its own. Everything is tied to you as the business backer. If your credit score is not stellar, a lender might see your business as a credit risk.
  • Your Pitch Did Not Inspire Investors: Investors hear a lot of pitches, and you should simply be prepared to hear “no” a lot.
  • Your Business Model Needs Work: While your idea might be great, you also need a path to making money, and yours may need refining before you apply for funding. You also may be losing money in ways that are not obvious to you but that investors see. Look for funding holes and repair them.

In his book, Lost and Founder, Rand Fishkin, founder of MOZ, reminds readers that when it comes to business, 5 in 10 will fail. Three of those that succeed will only make a small amount of money for investors, and two will make up for all the rest. Venture capitalists and even banks are looking for those two.

Even LegalZoom failed in their initial IPO before raising $500 million in their latest round of funding, which was designed to give current investors liquidity and move on to investors with a longer term outlook. Even large, successful companies have failed to get funding from time to time. Sometimes, it’s nothing you did wrong at all; you may just have asked the wrong people or at the wrong time.

Evaluate Where You Are Without That Funding

Just because you did not get this round of funding does not mean things are over. It is likely you are not out of business, but you will have to evaluate where you are now, as disappointing as that might seem, and where you need to go from here.

The first thing to do is look at your earnings now. This can also help with the previous step and determining what went wrong. Good accounting practices let you see if you need to scale back growth, return leased equipment, or take other steps to keep your business going. One of the most important steps to this is looking at your current cash flow. What kind of money do you need to cover your daily operations? Do you have that money coming in?

Secondly, look at why you wanted or needed that money in the first place. Was the need immediate, or was it to finance future projects that can be put on hold? If the answer falls into the second category, you can take some time to evaluate those projects and look for alternate funding sources or even shift your company focus.

Seek Other Funding Sources

No matter how you tried to get funding, there are other sources. If venture capital failed, you may have to look at loans. If one or both of those failed, you may want to look more creatively at some crowdfunding options. You may even simply want to look at other investors or banking options.

In business, a “no” often simply means you are that much closer to a “yes,” and that is no different with funding than with anything else. If one thing did not work, try another one. If you heard no, ask someone else, or reset once you have determined what went wrong and fixed it, and then ask again. This means expanding your network and practicing your people skills and sales pitches at conferences and wherever you go.

Even after funding failure, business is about moving forward, even if that means stumbling forward for a bit until you can get on your feet again. There’s no time to stop and wrestle with regret. A business that is not moving forward is already moving backward. Determine what went wrong if possible, take stock of where you are now, and seek other funding sources. This “no” may simply be one more step on your way to a “yes” and a successful round of company funding.

6 Most Common Ways Startups Are Leaking Money

In order to grow or even function, startups need to spend money, however, spending and leaking are not the same things. The greatest difference here lies in the efficiency of the investment. Every time you pay more for something that can be done with less, you are putting yourself further away from the break-even point and diminish the chance that your business will make it. In order to avoid this, you need to get familiar with six most common ways in which startups are leaking money.

Canceling your landline

Try to record every single time you receive a phone call and look at the report at the end of the month. One of the things you might notice is that, when compared to your website’s chat box, your email or even IM/DM service on your social networks, you receive relatively few calls via phone. In other words, having a landline is an option you can simply do without. Sure, if the majority of your customers belongs to the baby boomer generation, this might not be a sound idea. In any other situation, however, just outright canceling your landline might be a good idea.

Paying bills in person

Paying bills in person costs you somewhere around $12 per bill. Considering the number of bills you pay on a monthly and yearly basis this may amount to a small fortune. Most business owners, unfortunately, accept this as the inevitable expense of doing business without stopping to consider the possibility of paying these bills online. In this way, you could reduce the cost of paying for a single bill to $1,50 only, which makes this move incredibly frugal.

Inefficient marketing

The thing about marketing is that, in the past, it was nearly impossible to pinpoint its efficiency. Sure, you hire a marketing expert, let them work and experience a boost in sales, traffic and popularity. However, were you really able to tell which of the 10 techniques they used actually caused the increase? This is why John Wanamaker once said that although he knows that half of the money he spends on marketing gets wasted, he can never know which half.

Nowadays, in the era of digital marketing, such a thing is not necessarily true. For instance, when hiring SEO experts, you can insist on elaborate SEO reports on a regular basis, and thus be able to evaluate their efficiency. Even a complete digital marketing layman understands metrics like traffic, number of first-time visitors and conversion rate. In this way, you can stop spending money on areas that aren’t yielding you a decent ROI.

Not automating customer payments

In order to become reliable, customer payments need to be automated and organized into a subscription-like system. With present-day platforms and digital tools, this is fairly easy to achieve. In this way, if people forget to renew a subscription, even for a function they use every single day, you’ll automate this process so that it automatically renews. This will also mean that customers will need to cancel the subscription manually, which, on its own, might be enough to dissuade some people who are still on the fence when it comes to canceling.

Hiring unqualified people

Training people takes time and money and waiting until they acquire enough experience may cost you even more. In other words, hiring unqualified people is a clear money leak for your business, and one that can be avoided by setting just a bit harsher hiring criterion. Sure, this will diminish your talent pool or even cause more problems if you need to make an emergency hire, however, thinking about this in time is definitely a money-saving practice.

Web hosting

When it comes to web-hosting, you need to walk a thin line between free and too expensive. The first one may paint a bad image of your business, whereas high-end web hosting (although providing great ROI in the long run), may not be something you can afford. Luckily, the number of options out there is simply staggering, which should allow you to find a perfect choice, provided that you’re willing to invest a fair amount of research.

Conclusion

Apart from these six solutions, there are other ways to save money. Still, what makes the above-listed suggestion unique is the fact that it doesn’t diminish the efficiency of your research. Eliminating same-day delivery, lowering the quality of your products by skimming on supplies and laying people off directly affect your appeal and productivity. With the above-listed six examples, you get to save some money while not having to face a single significant downside.

Good Accounting: The Base for Any Growing Business

Imposed by internet “experts”, the “get rich” business model trend puts all of its focus on planning, branding, and marketing. Though crucial for any growing organization, these strategies are only as profitable as they are built upon sturdy financial support. Though being the only practice that effectively manages your budget, accounting is greatly overlooked by new-fangled business advisors. Its importance, however, is just as paramount as ever.

In fact, flawless bookkeeping is the most solid foundation an aspiring business can procure. Without it, any kind of ROI, progress, or growth would be impossible. Here’s why.

  • Staying on Top of Your Expenses

Running a business is never an easy feat, nor an inexpensive one. Particularly for those entering the market, the costs of launching a startup and running a small company can be overwhelming. However insignificant it may seem in the greater scale of things, even a single pen comes with a price that needs to be included in the overall calculation and run through the books. You might never lose sight of large expenses, but if not properly managed, pennyworths may widen the gap between how much your business spends and how much it earns.

  • Managing Cash Flow

Most commonly, these financial nuances are what makes or breaks a business. For no other reason but profitability, an ambitious entrepreneur has to be aware of every coin that comes in or goes out of the company. If well-situated, small business runners can choose to button up their numbers and keep their books on their own or outsource this sensitive task to an accounting firm. The choice is entirely yours, but it is the one you’ll have to make. Without accurate and transparent books, cash flow management is not possible, and without proper cash flow management, no business can move forward.

  • Evaluating Performance

Speaking of moving forward, accounting is essential for a reason or two more. Staying on top of your books means being aware of everything that happens under your leadership, which enables you to gauge the effectiveness of your current workflow and predict future performance with greater certainty. When clean, financial books will tell you exactly where you stand and in which direction you can go from there. After all, acquiring that kind of insight is what being business-savvy is all about.

  • Planning Ahead

Despite being overly superficial most of the time, the so-called internet experts are right about one thing: a business decision is only as good as it is data-based. Filled with numbers, your books are the ultimate source of financial information, and they should be leveraged as invaluable intelligence bases. With one glance, you’ll know everything about your future options, and be able to set projections, adjust goals and plan strategically.

  • Investing and Growing

If aspiring from a small-sized to a fully-grown business, the investment is the one word you should never use lightly. Every decision you make along the way, every marketing campaign you start, and every project you plan on developing will leave a noticeable trace on your budget. Before choosing to improve by investing in a new business venture, you need to know if is such an investment even possible and whether or not it will be profitable in the long run. Calculations of this magnitude cannot be done without good accounting.

Ultimately, successful businesses know no difference between small expenses and costly investments, and both are impossible to keep track of without an effective bookkeeping system. Whether it comes to applying for loans and filing for tax returns, hiring new people and expanding to new markets, or simply purchasing office supplies and throwing office parties, good accounting is what makes a small business opportunistic and eligible for further growth.