Guest post by Jill Beirne Davi (learn more about the author at the end of this article):
After making the leap from corporate employee to entrepreneur, I realized that I was going to have to completely change how I viewed cash flow in my life and in my business.
When I was working in the corporate world, cash flow was relatively simple to understand. I got the same steady paycheck every two weeks. I could plan for my future. I could save. But in business, I was investing money into startup costs, training, classes and products to help me get my coaching company off the ground. I didn’t have a system to map out my cash flow, and I was constantly worried that I was going to “run out of money.”
My biggest fear was that I was going to run out of cash with no new clients coming in and have to go back to the corporate world. One afternoon I sat down for about four hours and mapped out everything. I had avoided my business numbers for too long. I calculated my personal finances, business finances, booked business, and cash reserves to get a clear understanding of where I stood financially. Not the most fun afternoon I’ve ever had, I’ll admit, but in the end, I realized that in 60 days or less, I was going to run out of cash. It was clear as day. The numbers never lie.
I was disappointed, yet after the dust settled, I got into brainstorming mode. I started to see the numbers as a challenge to get myself motivated to create a different future than the numbers were predicting. I got into action and have seen a huge shift in how I show up in my business.
So here are my five tips for how to manage your cash flow as a new entrepreneur in business:
1. Know your minimums.
As a freelancer or entrepreneur, you’ve got to get clear on the minimum you must bring in to cover all your basic personal and business needs per month. In other words, what is the lowest amount you must make in order to have money to pay your bills, cover your business expenses, pay taxes, pay for your insurance insurance, and also give yourself a “living” allowance?
When you know this number, life gets easier. You’ll want to calculate this number to the dollar. Be very specific.
2. Set aside plenty of reserves.
Once you know your minimum number, then you can start to think about setting aside money in savings. (These are your reserves.) If you do not meet your monthly revenue goals one month, withdraw only what you need from the reserves in order to make up the difference.
If you have a great month and go over your monthly revenue goals, give yourself a little personal bonus for your hard work and put the rest of it in the reserves. Resist the urge to spend more on months that you make more. You don’t know when you may need it down the line.
3. Use creative strategies to get paid quickly.
Take a look at how you are offering your product or services. Do your clients pay you a retainer? A deposit? Payments? Cash up front? Use different pricing incentives that will inspire clients to pay more quickly. Send in your invoices immediately after service. Require non-refundable deposits. Offer a premium, higher end service for select clients at a higher rate that will generate more income with fewer customers, instead of trying to sell more of your lower end offerings. Be creative and price your products and services in a way that matches your minimum monthly revenue goals.
4. Factor in taxes.
As a personal finance coach, I’ve seen people strike out on their own and made decent money only to be hit with a massive tax bill in April because they forgot about them. Or they didn’t set aside enough. Build a strong relationship with your accountant and ask questions regularly today so that you’re not surprised later. I’m not an accountant but many entrepreneurs I know pay their taxes monthly or quarterly to make sure they are up to date on what they owe.
5. Understand what leads to sales.
In addition to getting clear on what your business revenue goals need to be per month in order to have positive cash flow, you must also understand what leads to sales in the first place. The truth is 80% of your revenue will be coming from 20% of your efforts. Therefore, you must know what leads to sales and track your progress in those areas.
For example, let’s say you’re a business coach, and you know that 80% of your clients come from your speaking engagements. In addition to tracking your cash flow each month, you must also track how many speaking engagements you’re booking per month. The speaking leads to the sales. When you track not only your cash flow but also what is driving your income in the first place, you have a powerful combination for smoothing out your income as an entrepreneur.
With these five tips you can start to quickly manage your cash flow as a new entrepreneur in business.
About the Author
Jill Beirne Davi is a certified money coach, specializing in helping women entrepreneurs get a hold of their personal and business finances quickly so that they can make more money and make their business profitable. You can find Jill on her website at www.AbundantFinances.com.