Many small business owners make financial decisions based on how much cash they have in the bank. Unfortunately, there are a number of pitfalls to managing this way. Let’s explore some ways that business owners manage by bank balance, the problems associated with these practices, and some alternatives that will help you stay in great financial shape.
1. You pay bills as they arrive, based on your bank balance.
Having been an accountant for so long, I frequently discuss finances with my kids. They know all about budgets, how credit cards work, and why we can or cannot afford certain things. It’s important to me that they understand money isn’t in constant supply and, even as adults, we have to make choices.
I was talking with my children about a potential new client yesterday. The kid asked me how much the new gig would pay, so I told them about some of my package pricing. That sounded like a lot of money to them, so I explained that it all depends on how many hours the work takes. Naturally, they wanted to know about how much I would make per hour. I told them my hourly rate and they were astounded. That’s a lot of money! It takes me forever to earn $10! I further explained that while my rate sounds like a lot, they have to remember that I have a lot of unpaid time too.
Time tracking is a subject that causes many a manager’s eyes to roll. The concern is understandable. Most of us have experienced the negative consequences that occur when bad time tracking practices are employed. Time tracking can be a major headache, if you get too granular and it can make employees feel like “the man” is watching their every move. There are ways to implement time tracking that minimize the commonly quoted reasons for hating the policy, but first you need understand why time tracking is important (even if you bill on a fixed fee basis).
When you track time, you are gathering data that will allow you to do project costing. This is especially important when you’re working on a fixed fee. I once had a client who bid a project low because it was a good publicity piece. Since they knew it was going to be a loser, they didn’t bother keeping up with the project cost reports. When the project was finished, they finally took the time to review the time data they had gathered. Guess what? The project was over budget by 400%! The designers went crazy trying to make it the best piece ever. Why? Because no one gave them a limit. When you actively monitor your project time and budgets, you can give your employees a sense of the project scope and keep scope creep under control.
Project costing information also helps you price future projects. Take the above situation, for example. With the time and cost information on that project, the client is armed with useful information for a similar quote request. Sometimes a project is over budget because of poor project management and sometimes it’s just a bad quote. Managers will have to do their own due diligence to determine why the project went south. The time tracking information will help them figure out the problem on current projects and will be a great resource for future project pricing.
No one likes tracking their time, but it is important, even if you bill on a fixed fee basis. Here’s why…
If you have spent much time with 2nd grade boys, you’ll know that productivity and focus are not things they excel in naturally. My son is in the 2nd grade; I know them well. (Note: I know girls exhibit these traits too, it just seems really pronounced in 2nd grade boys)
I’ve been supporting the accounting needs of mac users for quite some time. Until last week, I was using my mac mini to help those clients. I foolishly bought a mac mini because I already had a pc laptop and, like it or not, most accounting is done on the pc platform. And I didn’t want to spend the money fully transition.
Last week, a windows update corrupted my computer. I don’t know what’s wrong with it. It has numerous issues and I’ll have to reinstall the operating system (man, I hate Vista). To get up and running quickly, I transitioned to the mac mini.
I LOVED it (except being chained to my desk and only having one monitor). I said “to heck with the budget, I NEED a MacBookâ€. Seriously. I know, I’m an accountant. I reason that I’m much more efficient on one machine rather than two. Plus cut and paste between the virtual machine and the mac is awesome!
FreshBooks® is an online invoicing system made for small businesses. I’ve been using FreshBooks for 8 months and I LOVE it. It really can make your business life easier.
I work with small business owners to help them get their accounts receivable under control. Very often, there is a stack of past due accounts receivable. I immediately question what’s happening. Generally, the answer is “I haven’t had time to follow up with them.â€Â I immediately get to work on the follow up calls.
Most of the time (at least 80%), the customer responds “I never got that invoiceâ€. There are a couple of ways FreshBooks will stop that response or at least give you ammunition. First, when you use FreshBooks to email your invoices, your customer has to click a link to view it. On your admin panel, you can see who logged in and what invoices they viewed (this shows up on your dashboard, so you see it immediately upon logging in). You will know if your customer is lying to you.
Here it is, are you ready? The number 1 way to get paid faster and increase your cash flow is VERY simple. INVOICE your clients! On time, accurately, and with all of the information they require. That’s it.
I cannot tell you how often I see businesses that are really struggling with cash flow, but they aren’t staying on top of the invoicing. Or, they are sending invoices that are not accurate or don’t contain the basics (like the customer purchase order number).