Money Matters: How to Track Your Cash – and Keep It Flowing

When it comes to making smart decisions about money, Dawn Fotopulos is one of our all-time favorite folks to turn to for answers. Dawn, the CEO of DF Consulting, Inc. and author of Accounting for the Numberphobic: A Survival Guide for Small Business Owners, is one of the most popular speakers at QuickBooks Connect. Why? Because she’s incredibly smart, supportive, funny and direct. Most of all, she’s deeply passionate about helping small businesses succeed.

No surprise, then, that we turn to Dawn for the straight skinny on money matters (because we all know money really, really matters). Today's topic? How to track your cash -- and keep it flowing. 

Count every dollar (or pound, euro, dinero, yen, renminbi, rupee … )

Here’s a startling statistic: Dawn says that 75% of small businesses in the United States only have enough cash on hand to operate for 30 days, max. According to JP Morgan Foundation, one-quarter are just two weeks (or one payroll cycle) away from bankruptcy. With this dark cloud looming over the heads of so many entrepreneurs, no wonder most of us put “get finances in order” on the to-do list somewhere between “change cat litter” and “schedule root canal.”

Instead of dreading (and completely avoiding) getting financial clarity, Dawn says those of us who work for ourselves should start by asking three questions:

• Am I making money (showing a profit)?
• Can I pay my bills for the next two months (cash flow)?
• Am I building or destroying wealth (net worth)?

If the answers to these questions are as familiar as your own name, congratulations! You’re already on your way to managing your money like a pro. Unfortunately, simply knowing your numbers doesn’t guarantee your biz is in the black. Now you need to determine if your business is genuinely profitable today and if you’ve got cash on hand to cover your expenses tomorrow. Here’s a roadmap for figuring it all out.

• Calculate all the money you’ve earned from customers and clients in the past month. This big pile of money is your revenue.
• Determine who you owe money to: suppliers, an accountant, your landlord, the insurance company, a web developer, your dog walker … These are your expenses.
• Subtract your expenses from your revenue. What’s left is your net income.

Analyze this

Dawn says you should look at your Net Income Statement every month. Here’s what the numbers will tell you.

• Is your net income positive? Hurray! You’re earning a profit. Experts suggest your revenue should be at least 15% higher than your net income for your business to be on solid ground. That means you should spend no more than 85 cents for every dollar you bring in.
• Is your net income break-even? Your long-term business success might be at risk. Thankfully, now that you’ve discovered this potential problem you can start thinking about how to fix it.
•  If your net income is negative, you’ll need to make changes right away to turn your business around to avoid bankruptcy. Bankruptcy, of course, is the "game over" moment when you run out of money or any sources of cash.

Also worth noting: Near the top of your net income statement is your gross margin (or gross profit). Your gross margin should be 30% on every product or service you sell. “Most business owners offer deep discounts because they think they need more customers,” says Dawn. “What they really need is more (and higher) gross margin.”

Red alert to stay alert

Here’s a scenario that may be hard to swallow: You’ve crunched your numbers and proven your profitability. Hurray! But before you do your happy dance, consider that a business can show and still be going bankrupt. Yep, it's true. Which is exactly why Dawn stresses the need to constantly – we’re talking daily – monitor and measure both profits and cash flow. Here’s how she puts it: “Cash is to your business like blood is to your body. It’s the life of the business. It's not enough to manage for profit. You have to manage your cash position like a hawk.”

Before we turn it over to you, our QB Community members, we’ll share one last tidbit to drive home the importance of knowing your numbers. “Your accountant isn’t going to run your business anymore than your mechanic is going to drive your car,” says Dawn. “And when the bank calls in a loan, it doesn’t call your accountant. It calls you.”

Time for Q&A!

Here are some burning financial questions from our QB Community members. Don’t see the answer you’re looking for? Just post your question or comment below and get one step closer to getting the info you need.

Dear Dawn,

I started an immigration business in the middle of last year. My overall expenses are low, but now that I'm paying myself, I'm showing a loss each month. My issue is getting more clients to my business to move the numbers in the right direction. It has taken time. I need more clients!

Thanks,

Cee T.

Dear Cee,

You’ll need to figure out what you want to pay yourself, then back into how many transactions of what average sale per transaction you need to get there.

You can do it!

Dawn

Hi Dawn,

Is there a system for identifying when our cash levels are in trouble? I have a hard time staggering jobs and planning out when money from completed jobs will come in.

Best,

Zach M.

Hi Zach,

Great question. You should have three months of operating cash on hand to keep the business above water. Know what your expenses are for the three most expensive months of the year and plan accordingly.

Good luck!

Dawn

Dear Dawn,

It’s tough living off profits, with no room to invest. I guess “success” means not giving up.

Sincerely,

Larry S.

Dear Larry,

Let me share Norm Brodsky's definition of "success" in running a small business:

It's being able to live off your own cash flow. That's when there's adequate cash flow to pay for all the expenses of the business and pay for your household. Your business is the golden goose that should support you and your family too. Isn’t that why you sacrificing all these sleepless nights? To be able to live off your hard-earned cash.

Larry, keep this goal in sight!

Warmly,

Dawn

Before you go

QB Community members, do you keep track of all money matters yourself or have you hired an accounting professional to help? Please tell us your strategy for financial success!

More learning, right this way!

Here are some more helpful articles about money matters, from Dawn and other QB Community experts:

• Find an Extra $500 in Your Business Today
• Let’s Do the Math: Know Your Target Number