By: Angeline M. Huffman, MBA

The importance to a small business of effectively managing the business' cash flow is second only to bringing revenue into the business. However, many small business owners make significant yet avoidable mistakes in the cash management area. Here are six of the most common, and a suggested remedy for each.

Mistaking Revenue for Profit
One of the most common questions from small business owners is, "I made $X last year, so why don't I have any money?"

The answer lies in how the word "made" is defined. Most often the owner thinks of the revenue he brought into the business as what he has "made," or his profit. This is most often the case with newer business owners who spent most of their working lives as employees who received a regular paycheck. They equate money "made" with "takehome pay." They consider revenues to be take-home pay. The owner has not deducted his expenses, at least mentally, from what he thinks he has made to come up with a true profit figure for what he has actually made.

Remedy: Remember to use this formula: Revenue minus expenses equals profit (or what the business has "made").

Not Regularly Tracking Expenses
Now you may ask, "Who wouldn't track their expenses?" But ask any small business tax accountant and she'll tell you how many small business owners bring her their receipts in a shoe box quarterly or at the end of the year. Even when the expenses are recorded either by hand in a ledger or by computer in a spreadsheet or accounting program, it is usually not frequent enough for the owner to have an up-to-date calculation of his profit.

How does this happen? Very easily. Most small business owners wear many hats when running their businesses. They get tied up in doing the work of the business and it becomes very easy to put aside those tasks that do not involve providing the service or selling the product. But the bottom line is that you cannot arrive at an accurate profit figure to know how much you have actually made if you don't know how much your expenses are.

Remedy: Set up an expense tracking system and use it on a daily basis.

Owner Does Not Pay Herself a Regular Salary
So what is she living on? Oh, she is taking money from the business to pay her personal bills. The mistake is that it's not on a predetermined, regular basis. Money is taken from the business in a haphazard, asneeded manner, often as cash from the register. This creates a challenge in tracking just how much the owner is paying herself. It is difficult to plan for cash flow needs when the amount the owner takes from the business varies month to month. This also creates havoc in the personal financial arena because it never fails that the business is low on cash at the same time the bi-yearly car insurance or monthly house payment is due.

Remedy: Business owners must pay themselves a predetermined regular salary.

Not Separating Business and Personal Expenses
The personal checking account is low on funds and the house payment is due. In the interest of saving time, the check is written from the business's checking account. The owner is at an office supply store buying supplies for the business and remembers that his teen needs a notebook and pens for school. In the interest of saving time, all the items are rung up on the same receipt and put on the business' credit card.

There are two problems with mixing business and personal expenses. First, this doesn't really save time because now the owner, or his accountant, needs to figure out which expenses written from the business checking account or charged on the business credit card are for business and which are personal in order to accurately track and record the business's expenses. Second, once the funds are taken from the business accounts for personal expenses, they are no longer available for additional business expenses.

Remedy: Always avoid paying for personal expenses with the business checking account or credit card and visa versa.

Many small businesses are started on a shoestring. We all know of success stories about businesses that started with little or no money and became very successful very quickly. But this is the exception, not the rule. Most businesses cost more to start than originally planned. In addition, it can take years to bring in enough revenue just to cover expenses. It is a tendency of newer business owners to underestimate costs. It is also their tendency to be overly optimistic on how quickly and how much revenue the business will generate.

Reference Document: click here.

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