By: Elaine Pofeldt
One of the biggest challenges for very small businesses is cash flow. When you’re a freelancer or solo professional, you can’t always control when clients pay you, especially if you are serving very large organizations. Even if you make a six-figure income or above, there may be times during the year when you’re short of cash for this reason.
There is really only one way to address cash-flow crunches, and it’s planning so you can prevent them in advance.
So how do you pull this off, when you’re facing demands to reinvest in your business, pay your own vendors, and pay your personal bills?
Recently, I spoke with Al Zdenek, a CPA and personal financial specialist who is author of the book Master Your Cash Flow.
Here are some of his strategies for mastering your cash flow, so you can enjoy the fruits of your hard work.
By keeping an eye on cash-flow year-round, solo entrepreneurs can get closer to achieving their business and personal goals, says CPA Al Zdenek, president, CEO and founder of Traust Sollus, a boutique wealth management firm.
Make planning a year-round activity.
The number one cash-flow challenge for many of the small business owners Zdenek sees is dealing with taxes. Many small business owners are so busy during the year that they don’t think about taxes until the early spring, when they drop off their information at the accountant. “They know it’s there but don’t really pay attention to it,” says Zdenek. That can lead to big, unpleasant surprises when they find out what they will owe come March or April, he says.
As a first step toward avoiding those shocks, Zdenek recommends working with professional advisors to come up with a financial plan that reflects what you want to achieve in your business and your personal life. “If you have those numbers added up, it allows you to see what you want the business to do,” says Zdenek. If, for instance, you have decided you need to make $500,000 this year to live the lifestyle you want, and you’ve booked $250,000 in work for the year, you’ll think about filling that gap as you decide which projects to take on for the remainder of the year, he says.
What if the gap seems insurmountable? He recommends opening yourself to creative ideas. “I suggested to one professional speaker that he double his rates,” says Zdenek. “He was shocked at first and said ‘I can’t do that.’”
Understanding the client’s reluctance, Zdenek suggested he charge the higher speaking fee with new clients and see how it worked. “He did that and found he had no problems,” says Zdenek. “He eventually did it with everyone. He basically doubled his income. He had the same expenses as before and had the same amount of time and also improved his life. He bought the vacation home. Now he could see himself affording it. It all starts with knowing what you are trying to do. If a person has a target, they somehow find a way to achieve it.
Plan ahead for taxes.
There’s a reason we often see headlines of seemingly wealthy celebrities going bankrupt, says Zdenek. They often don’t keep track of the cash that’s flowing in and get shocked with a bigger tax bill than they expect.
To avoid that happening, it’s important to plan ahead. Your financial plan for your business and personal life should factor in what you will have to pay in taxes, so you are aware of that on a year-round basis, he says. Creating a simple Excel spread sheet where you forecast your likely revenue and expenses for the year can help you get started, he says. Your accountant should be able to help you project what you will owe based on that, so you are not scrambling to come up with the money in the spring.
“You need to approach finance with CFO mindset,” says Zdenek. “The CFO is the one who handles the cash flow and makes decisions around cash flow, expenses or income. When you have a budget and are working in advance for the whole year, it changes your behavior.”
A good advisor will help you identify expenses you are not taking that you could be. For instance, if you entertain in your home frequently, you might be able to take deductions for part of your home insurance, utility bills, and repairs to the home, he notes.
“Find an advisor who is going to give you solutions and be proactive and showing you how you can be aggressive on things,” he recommends. “You will end up having to work less in your life. If your advisors don’t advise you correctly, you’re wasting dollars.”
Restructure how you get paid.
If you work in a field such as consulting and have been charging clients upon completion of projects, consider switching to a model where you ask them to pay you in advance or request a substantial-up front deposit and progress payments. “The brass ring is to always get paid in advance,” says Zdenek.
If you must invoice after work is done, submit your invoices promptly and follow up, he recommends. Once you adopt the mindset that comes with operating a well-run business, he says, you’ll be surprised at how much easier it is to reach your goals and live the life you want.