How to Measure the Health of Your Business

While you can look at your profit loss report to tell you what is going on in your business, there are a lot more signs you can look for (like your cashflow) to reveal the status and health of your business. Today I’m breaking down things you may be doing that impact your cashflow, how to ensure you have a positive cashflow and tips to keep it that way.

The Impact of a Negative Cashflow

Especially in the online space, I don’t hear a lot of other bookkeepers talking about your cashflow. You know what your sales and profits are, but you can have a negative cashflow even with a profitable business. If you get to the end of the month and wonder why the balance is low again, you’re making good sales but your bank isn’t reflecting it, your profit and loss looks good but again isn’t in the bank, chances are you have a problem with your cashflow.

What is cashflow? It’s the total amount of money that’s transferred in and out of your accounts. So when you pull your bank statement, it’s all the money coming in and all of the money going out. A positive cash flow means that month over month, you’re adding money to your bank account. A negative cashflow, naturally, means that the total amount in your account is decreasing over time.

As a creative business owner, there can be some fluctuation month over month. Some negative, some positive. Maybe you’re a photographer and you have way more sessions booked during wedding season, so some months have a higher profit than others. But today I’m going to give you some tips to make sure that you have positive cashflow months and share what you need to look for.

Paying for Personal Bills out of a Business Account

Let’s say you’re at Target and get yourself some cute fall decor but you use your biz card since you left yours at home. Then a couple months later, you pay off that card. Neither of those transactions show up on your P&L, but will show up on your balance sheet. Paying off that card affects your bank account balance. This can also happen with business purchases. If you make a purchase and record it in July but use your card, when you go to pay off your card in September you can’t write it as an expense again. It just comes out of your account.

I’ve also seen where people pay off personal cards from their business accounts. Again, that’s not a business expense and won’t show up on your P&L. So your business may look profitable when in reality your bank account is lower than you’d like. To plan for your business future, you need to really understand your cashflow. You’ll want to look at your budget and projections, but your cashflow is the heartbeat of your business. A positive cashflow is how you’re going to make decisions to plan and grow your business.

If you only get one thing out of this blog post, it’s this: DON’T MIX BUSINESS AND PERSONAL FINANCES. No more using your biz card for fun Target runs, or using your biz card for personal expenses (or personal card for biz expenses). It makes things hard for bookkeeping, and for your your cashflow.

Dealing with Inconsistent Months

So let’s talk about billing, and those inconsistent months. As a creative, this may be a big challenge for you. Depending on how your clients pay you, whether it’s pay in full or payment plans (and when they pay you), it can be tricky to plan ahead. You might hope people go for the payment plan, but instead they decide to pay in full, so one month you have a huge influx of cash. And then you might have a few months after that with little to no sales. That’s totally fine, as long as you can explain why you have a few months of negative cashflow and it’s taken care of. If your negative flow is from personal expenses, you’ll want to take a closer look and maybe make some changes.

As you can see, how you bill your clients will impact your cashflow. You can even pay attention to when during the month your clients pay you, because that can impact it too. If you’re looking at month over month with a retainer service, when are you billing? A tip here is to have a subscription with automatic billing, with a set time each month that you get paid. That way you’re not worried about invoicing, and if they’ll pay late, or whatever. You’ll just know that you have x amount of dollars coming in on that day. You also want to know when your income is coming in and when bills are due.

Personally, I’ve set up my income (subscriptions) to come in at the beginning of the month. Then, a lot of my expenses, payroll, etc will hit around the middle of the month. That way I never spend the money before I get it.

Maintain a Minimum Balance in Your Account

This is something that I personally do and always recommend. Have a minimum balance in your account so that way if you are ever paid late or have a client drop, you always know you have what you need to pay for your expenses and keep your business running. Whatever that amount is for you, keep the minimum in your account at all times. This will help you to make decisions that’ll yield a positive cashflow month over month.

Just a quick reminder, if you have a negative cashflow, that’s ok. It doesn’t necessarily mean that you are failing. Especially starting out, there’s a lot of expenses involved in starting a business. The important thing is to make sure you know why that flow is negative and make decisions accordingly.

Five Tips for Better Cashflow

1 | The number one thing want you to do if you’re a service-based business is to bill before the services are rendered. If you’re a photographer, brand designer, web designer, copywriters, whatever. Bill. First. That way you’re operating on a positive cashflow. Maybe you’re a photographer and your clients make a deposit. Chances are, you still have it recorded that the remainder is due before the wedding (or family session, biz shoot, etc). If you are sending invoices after you complete a project for a client, try shifting to “How can I change things to bill before the service?”

2 | Another thing you can do is anticipate future company investments. Do you want to join a mastermind, buy a course, get a new camera or computer? Whatever it is, plan for it. You know you want to spend a specific amount of money, so what do you need to do to make sure you have it in your bank account? I have my investments planned out for the next six months. Now, those investments are subject to change, but planning and having that idea of what I want to spend allows me to make sure I’m prepared for it.

3 | I’ll often have people come to me, I’ll take a look at their books and tell them they need to increase your prices. Especially towards the end of the year, and with the economy the way it is, it might be a good time to bump up your prices. If you don’t feel good about it, then of course don’t do it. But also keep in mind that things change, take a look at competitors, and just reevaluate every once in a while if it’s time raise your prices.

4 | Another tip is to reevaluate ALL of your expenses. This is something I recommend doing month over month, but every once in a while it’s good to do a deep dive. Ask yourself, “Do I really NEED all of these expenses? Are these expenses saving me time or increasing sales?” Contractors, subscriptions, etc. If they are not increasing sales or saving you time, is it an expense you can cut?

5 | My final tip to having a positive cashflow is to have a rainy day fund. This is a savings account where you have money set aside, to where even if you have negative cashflow months or a few months with little to no income, you STILL have enough to keep running your business. Let’s say you launched a 6-month program and everyone paid in full. You’re nearing the end of the 6 months, and that last month is a bit tight. With a business emergency or rainy day fund, you are totally fine. Because you’ve set aside that money and have planned for that lower income month. No stress! Because you were prepared.

To sum it up, having a positive cashflow all comes down to planning. Financial planning in your business isn’t possible without proper, up-to-date bookkeeping 😉 You can’t just take a quick glance at your QuickBooks and run and hide from your numbers. Having your books up to date gives you a clear picture of where your numbers are at. If cashflow is something you’re struggling with, you can always reach out to us and see if our bookkeeping services are a good fit for you! Having a clear understanding of your cashflow gives you so much peace over the health of your business, and these tips will help. If you have any questions, reach out to us at hello@profitpriority.co , we’d love to help!