As a business owner, there’s nothing worse than worrying about money. When you’re caught up in the short term, checking your bank balance every day to make sure you have enough cash to cover the bills, you don’t have any time to focus on the big picture. In short you’re stuck doing business instead of building one? The key to knowing your business won’t run out of money is know your breakeven.
If cash flow has become a source of constant stress, here are three simple steps you can take to address the underlying issues and start breathing easy again:
Know your breakeven so you don’t run out of money
Before you can start taking steps to achieve a healthy bank balance, you need to know exactly what that looks like for your business. Do this by first calculating your breakeven.
Your breakeven point is the level at which costs are equal to income. It’s the minimum amount your business needs to survive, covering all your bills and daily costs of operations.
It’s important your breakeven point also includes your salary and dividends as the business owner. You might be tempted to say, “money is tight right now, so I won’t pay myself,” but you work hard on your business and you deserve to be rewarded for it. Otherwise, why did you start it in the first place?
Once you know the bare minimum of cash you need to cover costs, you can next calculate what a healthy bank balance looks like for your business.
Aim to have at least 3x your breakeven in the bank
We see a healthy bank balance as being three times your monthly breakeven figure. For example, if you had a breakeven of £10,000, we’d recommend maintaining £30,000 in the bank so you can confidently cover all your business’ outgoings for the next three months.
You’ll also need to continually monitor your bank balance to ensure it stays at this healthy level. Things can change quickly in business, so we recommend reviewing your balance on a regular weekly or even daily basis. If weeks go by without checking in on this balance, it could cause big problems down the road.
It’s okay if you don’t have three times your breakeven point in the bank right now. There are steps you can take to change that, like chasing up customers for outstanding balances or getting a bank loan (remember, you can get tax relief on interest payments for a loan!) Whatever your financial position is right now, you have options to change it.
Once you know what your target bank balance is, the next step to never worrying you’ll run out of money is getting processes in place for if and when you fall below this amount.
Turn up your processes if the balance drops
If your bank balance falls below a healthy amount, this should trigger alarm bells for you and your team to do something about it and start getting money back in the bank.
It’s like when you’re driving down the road and see a speed limit signpost up ahead. If you’re going over the limit, you know you need to take action and start slowing down. When you see the warning signs in your business – like dropping below your healthy bank balance – you need to take action and prevent your business from running out of money.
Some processes you can get in place to help get back to your healthy bank balance are:
- Chasing up customers for overdue payments
- Making sure completed or in progress works are invoiced
- Monitoring spending and eliminate any unnecessary or over budget expenses
Bad cash flow is a symptom, not the problem itself. The root of your issue is your processes, but if you turn them up when you need to and make sure they’re as robust and automated as possible, you can be confident you won’t run out of money in your business.
Take action now so your business won’t run out of money.
Remember: the path to success is paved in tiny but meaningful steps. If you’d like help calculating what your monthly breakeven is or what steps you can take to get three months’ money in the bank, get in touch.
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