Managing the cash in your business is always a critical process. Among the things you need to do with the cash you generate is to pay suppliers, employees, landlords, lenders, mortgage holders, shippers, utility providers, partners, and of course, yourself.
YES, I said, PAY YOURSELF. If your business cannot afford to pay you what you could earn if you worked for someone else, maybe you should go to work for that other person. Check with your Accountant on a reasonable salary for yourself and the tax implications as well.
Sure, you plan on the business income exceeding expenses, but maybe this is not always the case. Maybe you are starting up. Maybe you are in a slow season. There are lots of “maybe’s”. You need a plan to have a source of cash when needed. Lines of Credit may offer some help, but they also increase your costs. Consider the opportunity costs associated with your business and balance the risks of putting too much in one bucket.
Ideally you put enough aside when you started the business to get through the initial phases. Maybe you put enough aside during your big season to carry you over the slow time. Maybe you set up your business to get income as soon as the sale is made or work is done or progress payments, and delayed paying suppliers for 30 or 60, maybe even 90 days, providing a cash flow from the “float”. Don’t forget to account for some bad debts on the collection side of this equation.
As your business generates cash consider putting something aside for the unforeseen events that are likely to happen. Will you need to hire a consultant for some expertise?
Some people will advise setting up 3-6 months reserve of revenue for the unforeseen.
Steve Koenig, SCORE Counselor
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