There is a fiscal cliff bearing down on the economy and it will hurt plenty according to Federal Reserve Chairman, Ben Bernanke. Unfortunately, many small businesses face their own fiscal cliffs every month by not running their companies effectively.
Here examples of fiscal cliffs small-business owners struggle with and how you can avoid them.
1. Paying vendors in 30 days, but collecting from customers in 60 days. Pure arithmetic shows this is not an effective long term strategy. This means that even if the company’s gross profit is 50 percent, the business is out the other 50 percent for an additional 30 days until customers pay. This is a perfect example of poor cash flow management.
How to avoid the cliff: Collect from customers before having to pay vendors. When possible, have customers pay at the time of service using credit cards. Negotiating 45 to 60 day payment terms with vendors is also helpful. These two actions will reverse cash flow in the company’s favor.
2. Employees stay less than a year. It costs 40 percent to 400 percent of an annual employee’s salary to replace him or her. This type of “churn and burn” will kill a growing company.
How to avoid the cliff: Every business should know what their employee retention rate is. Ensure there is a comprehensive hire, train and management plan in place for each team member. Treat every employee as an asset that needs to be nurtured and grown inside the company.
3. No financial statements or budgeting. It is impossible to know where a company is going unless they know where they have been.
How to avoid the cliff: Review financial statements monthly. Learn what they mean and how the information can be used. Create a budget annually and revise it once a year.
4. Not managing inventory. Many companies keep buying inventory to meet customer demand that never comes. This eats up the company’s cash and makes it impossible to invest in other areas of the business.
How to avoid the cliff: Keep careful track of inventory levels. Optimize turn and fill rates for each product. Not every product should always be "in stock".
5. Accounts receivables that keep growing. Most customers want to pay their bills. Too many small businesses are afraid to aggressively collect the money that is owed to them.
How to avoid the cliff: Set clear payment terms with customers. Send bills on time and confirm that the customer received them. Ask when the bill is schedule to be paid. A week before the scheduled payment date, call to confirm it will be paid. If the payment does not arrive on time, call to see when it will be paid. In this case, “the squeaky vendor” will get payment faster.
How do you avoid your fiscal cliffs?
Read more posts about financial matters.
Photo: Getty Images