How to Avoid Common Business Money Management Mistakes
Does your business have enough cash? You may be thinking that, because you have enough to cover payroll and expenses today, you may not have to worry about the future. However, it’s important to consider the long term, including plans for growth and the possibility of funding gaps. Proper cash flow management is essential to business success. Having too much cash on hand, or not enough to seize opportunities like investing in a new line of business or purchasing real estate, presents real challenges for businesses of all sizes.
At Rockland Trust, we can help you navigate the following common cash flow challenges so your business continues to thrive.
TIP 1: Combining business and personal funds
Be mindful of how you allocate your funds. If you started your business with a home equity loan, or put business expenses on a personal credit card, be sure to track these transactions closely. Otherwise you may find it hard to separate business and personal finances when you need to, such as if you’re looking to refinance any debt.
By tracking your funds closely, you can over time, reallocate your finances as necessary so business debt stays with your business, and personal debt stays with your personal finances. Though it varies by industry, the rule of thumb is that new self-funded business owners should look at where their business stands at the six-month and one-year marks to determine if they need to re-evaluate their cash flow situation. You may also want to consider whether creating a business entity or account right up front makes the most sense for you.
Checking in with your advisement team will help you determine the best path forward for financing.
TIP 2: Waiting too long to look for options
Another common mistake business owners make is waiting until the last minute to secure financing. For example, many wait until an opportunity arises to begin the process of obtaining funding. It’s like waiting in line on game day to buy Red Sox tickets... it often doesn’t go well. Waiting to investigate your cash flow options can create a stressful financial situation when you need an instant line of credit, as they can take time to process.
Eve Stoltz, VP of Business Banking at Rockland Trust, said that the number one tip she gives businesses is to secure a cash flow safety net, like a line of credit, prior to when you really need it. “Planning in advance for potential future cash flow problems is key. You want to come to your lender to discuss options for cash flow purposes when you aren’t in your busiest season or in a panic, or before a big growth spurt.”
TIP 3: Not considering seasonality
Seasonality doesn’t just apply to businesses that rent jet skis on the Cape or those that plow snow. Other industries also can be seasonal in nature, such as an accountant who has a year’s worth of business during tax season or plumbers who are called in to fix frozen pipes in the winter.
If you own a seasonal business, managing cash flow can be even more crucial. Because your business may operate at a surplus for a certain period during the year, it requires a different financial strategy. For example, Eve recommends that seasonal businesses consider analyzing bank statements from the busiest month of the year and from the slowest to create a proper cash flow management plan that ensures gaps are bridged.
Create a Plan For Your Money
Having a clear plan will enable you to better manage your cash flow. When developing your plan, it can be helpful to consider your money needs falling into one of three buckets: short term spending, mid-term spending and long-term spending.
These buckets help you properly allocate resources for the full year. The short-term bucket is for cash that has an immediate purpose, such as funds for payroll, while the long-term bucket is for cash that you can grow long term to be invested in future projects. Your middle bucket is where you want to grow your money but have it accessible in case you need it for unexpected opportunities. You may want to put some excess cash in a business money market account so that cash makes money for you until it’s needed.
Growing this middle bucket allows you to transfer money if you really need it or move some into the third bucket for long-term planning and spending. While you may have a business line of credit for emergencies, this middle bucket can help ensure you have enough to cover emergencies. That peace of mind is priceless if you’re waiting on insurance money and your line of credit doesn’t cover all damages, for instance.
Consulting your banker early and often will help you avoid these challenges. Checking in with your banker at least every six months will give them a clear picture of your business’s financial standing. There is no such thing as oversharing! Visit one of our branch locations to discuss the financial plan for your business.
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