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Keep your small business in good standing

Date posted:  1/28/16 12:15:00 PM It's not always easy to keep money in reserve for small businesses.

Shelley Swanlund understands the perils that business owners face, but there isn't much she can do other than offer some sound advice.

Swanlund, the vice president of business banking and head of small business for a Canadian financial institution, knows that many small businesses around the globe are struggling to keep their doors open in a difficult economic environment. The biggest problem is a lack of growth, as a slew of business owners seem afraid to expand. Swanlund said it's not for a lack of optimism.

"While more business owners are feeling better about their financial health this year and are optimistic about the future, this optimism is not translating into growth or expansion plans for their businesses," Swanlund said.

She added that startups and small companies are not looking into expanding their operations, with many ventures failing to use tools such as borrowing or investing to increase the reach of their operations.

Keeping track and making projections
The single most important factor for the health of a small business is cash flow, according to the Small Business Administration. Cash flow shows what funds are coming in and out of a company in any particular month or year. That money is the lifeline of a company.

The SBA urges people who are considering a startup - or those with newly minted businesses - to calculate the upfront costs of launching a company, along with the variable and fixed monthly expenses it takes to run such a venture. After this is complete, a business owner should then project their sales totals to see if a company could be profitable with the aforementioned expenses.

This keeps business owners with a specific goal in mind and also lets them know whether their projected income can make a company profitable and sustainable.

The SBA also urges business owners to think about what will help them reach their ideal outcome. In order to lay a successful foundation for a company, entrepreneurs must have a clear vision and mission for their company. A few examples of driving forces include incentives for both individuals and the entire organization, a commitment to the company using coherent action and a defined vision of goals and values, according to the SBA.

Consider cash flow
But even if a company has great vision and defined goals, it can be hard to stay in business if there isn't enough cash flow coming in and out.

"While many businesses do have cash on hand, most tend to see it as a rainy day fund they can access in the event they have a slower month with their cash flow or have an unforeseen emergency," Swanlund said. "But this effectively leaves these funds on the sidelines rather than supporting the business."

This can lead business owners to turn to their personal finances in order to execute plans for expansion. By adhering to this method, it can limit the capital that is available to them.

Keeping cash in reserve
Swanlund said 80 percent of businesses are keeping cash in reserve, but many aren't receiving any sort of return on that money.

"Holding cash reserves in your business is a smart move to ensure you can withstand operating changes or deal with a shortfall in your cash flow, however business owners should be more active in looking at investment or savings opportunities to help grow those funds over time," Swanlund said.

Nearly four of 10 business owners said they aren't netting any sort of interest on their cash reserve, according to Swanlund.

The American Genius, a source for entrepreneurs, said small businesses should try to stow away some cash in case of a mishap or emergency, because scrambling at the last minute for funds can lead to headaches. The American Genius recommends small businesses keep at least three to six months of expenses in reserve.