June 27, 2013 | 4-minute read (727 words)
Do you understand your true business costs? Do you know how much it really costs to run your business? If you don't really understand your fixed and variable costs, how can you make sure that you are covering them?
Lack of understanding about your business costs is one of the biggest rookie mistakes—and, if you are a new entrepreneur, heading up a new venture, or attacking a new marketplace, you are indeed a rookie. Even if you’ve managed to start many a successful company, if you haven’t learned the critical value of calculating your costs and proactively managing your cash flow, you’re a rookie.
There are several symptoms of a small business in trouble: running out of cash, not enough customers, staffing issues.
If your business is experiencing any of these symptoms, it's time to take a step back, identify the core problems, come up some workable solutions for plugging the cash drain, and then take a deep breath and implement a new strategy.
In my experience, these are four proven strategies for plugging up your cash drain:
1. Cost accounting. Just to clarify for the non-finance professionals amongst us, cost accounting is not the same thing as the kind of accounting system used to prepare your financial reports (which are hopefully GAAP compliant...). They are related, but different. Generally speaking, cost accounting describes a wide variety of systems and processes for collecting financial data which is then analyzed, summarized, and used to create alternative courses of action. In other words, it’s a decision-making tool that gives you the financial information you need to take control of your business operations.
Need help with cost accounting? Contact Early Growth Financial Services for all the financial services and support your business needs.
2. Set your budgeting goals. Calculate all fixed and variable expenses and subtract that from what your business is making. This is the foundation of your budget. How much can you continue to spend while still covering costs and pulling a profit? Be clear on your budgeting goals: how much profit do you hope to make—and, what will you do with that profit? Once you have your budgeting goals, you need to create your workable plan, implement, and, most importantly, stick to it.
3. Create a marketing plan. Marketing is key in helping you to develop long-term, strategic plans that can stop your cash drain.. Your sales forecast is an essential variable for cash and profit planning. It’s not enough to be tactical, you need to be strategic. Strategic marketing means finding ways to promote and sell your product so that you achieve specific goals. Marketing tactics are how you achieve this. If you’re not making money, marketing can help you to identify new market segments, to make necessary price adjustments, or to consider new product/service lines—all which can result in a much-needed cash infusion.
4. Rethink your hiring strategy. Human resources is the #1 cost for many small businesses. Controlling your staffing costs is a great strategy for slowing your cash-burn. I’ve written a previous post on this topic (Bootstrapping Your Startup: 3 Staffing Tips) so I won’t go into great detail here. The main takeaways are that you should understaff, hire for potential (rather than hiring for experience which can be an expensive proposition) and, most importantly, outsource, outsource, outsource! Identify all non-core competencies and find reputable firms to help ease the burden of these functions. This is a much more practical and cost-effective solution than hiring in-house.
Before your company goes down the drain along with your cash, consider these strategies. The truth is that the main reason why companies fail usually comes down to a lack of proper financial management. Don’t let that happen to you.
Is your business experiencing cashflow difficulties? Tell us about it in comments below or contact Early Growth Financial Services.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.