How to Track Your Cash and Keep it Flowing
When it comes to making smart decisions about money, Dawn Fotopulos is one of our all-time favourite people to turn to for answers. Dawn, is one of the most popular speakers at QuickBooks Connect. Why? Because she’s incredibly smart, supportive, funny and direct. Most of all, she’s deeply passionate about helping small businesses succeed.
No surprise, then, that we turn to Dawn for straight talking on money matters. We’ve asked her to help us understand how to track our cash better—and keep it flowing.
Count every pound
An overwhelming number of small businesses only have enough cash on hand to operate for 30 days. With this dark cloud looming over the heads of so many entrepreneurs, no wonder most of us put getting our finances in order on the to-do list somewhere between taking out the bins and seeing the dentist.
Instead of dreading—or worse, completely avoiding—getting financial clarity, Dawn says those of us who work for ourselves should start by asking 3 questions:
- Am I making money (showing a profit)?
- Can I pay my bills for the next 2 months (cash flow)?
- Am I building or destroying wealth (net worth)?
And here’s the formula for how you can start answering these questions: First, calculate all the money you’ve earned from customers and clients in the past month. This is your revenue. Then, determine who you owe money to suppliers, an accountant, your landlord, the insurance company, a web developer, your dog walker. These are your expenses. Finally, subtract your expenses from your revenue. What’s left is your net income.
How to know if you’re doing OK
Dawn says you should look at your net income every month. Here’s what the numbers will tell you.
- Is your net income positive? Great, you’re earning a profit. Experts suggest your revenue should be at least 15% higher than your net income for your business to be on solid ground. That means you should spend no more than 85p for every pound you bring in.
- Is your net income break-even? Your long-term business success might be at risk. Thankfully, now that you’ve discovered this potential problem you can start thinking about how to fix it.
- If your net income is negative, you’ll need to make changes right away to turn your business around and avoid bankruptcy.
If you’re finding yourself breaking-even or in negative income, your gross margin might be to blame. Your gross margin (or gross profit) should be 30% on every product or service you sell. Dawn warns that “most business owners offer deep discounts because they think they need more customers. But what they really need is more (and higher) gross margin.”
Don’t leave it all to your accountant
You’ve crunched your numbers and proven your profitability. But before you rest on your laurels, know that a business in this position could still be going bankrupt. Yes, it's true. This is why Dawn stresses the need to constantly—we’re talking daily—monitor and measure both profits and cash flow. Here’s how she puts it: “Cash is to your business as blood is to your body. It’s the life of the business. It's not enough to manage for profit. You have to watch your cash position like a hawk.”
We know it can be tempting to leave the numbers to the professionals. And your accountant is there to help you along the way. But as Dawn says, “your accountant isn’t going to run your business any more than your mechanic is going to drive your car. And when the bank calls in a loan, it doesn’t call your accountant. It calls you.” So, make sure you stay on top of your own numbers to ensure your business’s success.
Ask the expert
Here Dawn answers some financial questions from our QB Community members. Don’t see the answer you’re looking for? Just post your question below and we’ll try to answer it for you.
Q: I started an immigration business in the middle of last year. My overall expenses are low, but now that I'm paying myself, I'm showing a loss each month. My issue is getting more clients to my business to move the numbers in the right direction. It has taken time. I need more clients!
A: You’ll need to figure out what you want to pay yourself, then back into how many transactions of what average sale per transaction you need to get there. You can do it!
Q: Is there a system for identifying when our cash levels are in trouble? I have a hard time staggering jobs and planning out when money from completed jobs will come in.
A: Great question. You should have 3 months of operating the cash on hand to keep the business above water. Know what your expenses are for the three most expensive months of the year and plan accordingly.
Q: It’s tough living off profits, with no room to invest. I guess “success” means not giving up?
A: Let me share Norm Brodsky's definition of ‘success’ in running a small business: It's being able to live off your own cash flow. That's when there's adequate cash flow to pay for all the expenses of the business and pay for your household. Your business is the golden goose that should support you and your family too. Isn’t that why you’re sacrificing all these sleepless nights? To be able to live off your hard-earned cash. Keep this goal in sight!
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