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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:
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.
Analyze this
Dawn says you should look at your Net Income Statement every month. Here’s what the numbers will tell you.
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:
---snip---
Is your net income positive? Hurray! You’re earning a profit. Experts suggest your net income should be at least 15% higher than your revenue for your business to be on solid ground. That means you should spend no more than 85 cents for every dollar you bring in.
---end snip---- {emphasis added}
Huh?
Revenue is sales in, the gross amount.
net profit is revenue less expenses
how could net profit ever be higher than revenue?
They seem to be using net income and net profit interchangeably
Hi @Rustler,
Thank you for reading the article and for letting us know this section was confusing to you! I will certainly look into it and clarify shortly. :smileyhappy:
@Rustler -- thanks for your sharp eye. There was an accidental swap of terms. Fixed now!
I like this quote:
“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.”
And also I like how you said cash flow is can I pay my bills for the next two months.
Steve Chase
I'm so glad you picked up some info from this article. :smileyhappy: Dawn Fotopulos is such a wealth of knowledge!
“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.”
Similarly, it's a good idea to understand enough about your car that you can speak intelligently with your mechanic! It's articles like these and other resources here that really help me with small-business fluency. Then, when I work with my accountant (whom I love) our conversations are that much smarter and better.
Thanks, @WillowOlder!
No pun intended, @AudreyPratt!
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