Five Cash Mistakes That Can Kill Your Business
By: Ruth King
These five cash flow mistakes can kill your business:
- You are living off your checkbook.
As long as you have cash in the bank, you think you are ok. Not true. You never look at your financial statements…which tell you how you are doing in business. Looking only at cash in the bank can put you out of business.
- You don’t have proper cash handling procedures in place.
Put the proper procedures in place so that you keep the honest people honest and don’t tempt them. Procedures will never keep the embezzler at bay. He or she will find a way around the procedures. However, focus on the 99% of the population who is honest. Put, at a minimum, these procedures in place:
- personally look at your bank accounts on line every day
- bookkeeper does not sign checks
- owners or senior managers are the only ones who can add a vendor to your software program
- person who opens the mail does not make bank deposits
- send bank statements home.
- You live by what your CPA says
- Your CPA does your books on a cash basis.
That makes it easier for taxes. You need to operate your business on an accrual basis – paying taxes is ok on a cash basis – that’s between your CPA and you. Only accrual based accounting shows you true profitability.
Being on a cash basis is like living off your checkbook – DON’T
- Your CPA tells you to spend cash in December.
You are having a great year. Your tax bill is higher than you want to it be so your CPA says to spend your cash. Spend cash right before the slowest quarter of the year for many companies? Doesn’t make sense. I’ve seen many owners have cash flow and survival issues in the first quarter taking their CPA’s advice to spend money in December.
- You are not your own bank
I’ve seen bankers put business owners out of business. The business owner has a line of credit with a bank and the bank is sold or management changes their loan practices. The bank calls the line and the contractor has 30 days to pay it back and can’t do it. The bank takes all the assets pledged to the line and the business is out of business.
Build a recurring program. Put at least 50% of the cash received from that program in a savings account. Then your pleasant dreams won’t turn into nightmares wondering whether you have enough cash to make payroll this week.
- Not putting 1% of every dollar that comes in the door in a savings account.
This is a corollary to #4. Even if you don’t put all of your recurring revenue money away, you can still put 1% of every dollar you deposit in the bank into a savings account. Do it starting today.
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Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.
