• Plan for sales volatility: After your first year, you should have an understanding where your best months are going to be so you can prepare cash to cover expenses during the down months.
• Overestimate expenses: Most expenses vary — utilities, overtime pay and supplies, for example. If you overestimate what these costs will be, you’ll protect yourself from running dry when expenses are high. If you do end up with extra cash, consider reinvesting it.
• Share your budget with employees: Too many business owners keep the company’s financial statements a secret from internal staff, when, really, being transparent with employees can help them understand the business, the bottom line and what they can do to help drive the organization toward success.
• Put money away for taxes and emergencies: Remember, with profits come taxes. A good business practice is to set aside at least 30 percent of your profits to take care of tax-related expenses or unforeseen emergencies.
• Anticipate future expenses: It’s hard to plan for everything, but try to consider what’s coming down the pike every year. Things like training and recruiting expenses, marketing and advertising increases, or maybe you’re planning on switching to cloud storage in 2019. Make sure you understand the investment and have the funds on hand.
Now, let’s address one more important item when we’re talking about a businesses’ financial health: working capital. Working capital is defined by this formula: current assets – current liabilities = working capital. This metric tells investors important information about your operational efficiency and whether the short-term financial outlook is positive. Know this number.
Take this a step further with this formula: current assets / current liabilities = current ratio. When you divide assets by liabilities, this tells investors whether the business has short-term assets to pay off short-term debt. Another critical metric. Ideally, that current ratio should fall between 1.2 and 2. When your current assets are less than current liabilities, you might have a hard time getting capital loans because this indicates you could have an issue paying creditors.
There are other formulae and algorithms to help investors understand the risk they’re taking on when they look at your business, but it all comes down to one important concept: keeping your working capital at a healthy level to predict short-term assets and liabilities, especially available cash. This is especially true for small business owners who might be looking to start a project or venture in 2019, as this often requires you to dip into your working capital.
Here are BBB’s tips on how to improve working capital:
• Incentivize receivables: Simply put, this implies compensating clients who pay early or on time and disjoining ties with clients who default on installments.
• Pay your obligation commitments on time: Instruct your records payable division or potentially bookkeeping group to pay obligation on time so you maintain a strategic distance from extra punishments.
• Research sellers: You need to consult with merchants for limits and keep up strong associations with them so that on the off chance that you ever require mercy while paying, they’ll oblige.
• Optimize settled and variable expenses: Reduce these costs wherever conceivable to attempt and wipe out inefficient spending. A decrease in costs has a quick positive effect on liquidity.
• Examine intrigue installments: Review these terms routinely in light of the fact that, frequently, the enthusiasm on advances and other settled obligation might be qualified for adjustment. Provided that this is true, you can satisfy the obligation quicker and save money on premium costs, which, once more, diminishes your risk.
• Manage stock: Don’t overload your stock and do be merciless about cutting items and administrations that aren’t pitching to keep your deals solid.