Many aspects of our lives revolve around a monthly schedule, and bills are no exception. We expect to make car, mortgage and utility payments each month. However, there are other expenses, such as taxes and insurance, that we pay quarterly, semi-annually or annually.
Most people don’t question the timing of monthly or yearly bills, but business owners should. When running a small business, you typically manage a much larger portion of money than a regular household. Therefore, to succeed, you should enhance your cash management strategies.
Monthly payments are a logical way to make many products and services affordable, as households generally get paid once or twice a month. Low monthly payments, as opposed to one upfront annual fee, are a great way for companies to sell more and to secure customers who may otherwise be reluctant to buy. With monthly payments, the customer doesn’t need to dig into savings to afford a product or service and can cancel if they don’t like it. Business owners benefit from this, as well as it’s easier to manage monthly payments than annual ones.
However, for a business, there are other implications to consider for the sales and billing cycles. For sales, the yearly revenue method helps to better understand the value your clients bring to your company. For bills, you should be comfortable with a year-long commitment; otherwise, reconsider your purchase.
Follow these tips to better manage your small-business cash flow:
Use a relevant time frame. For a small business, your perspective can’t be monthly. You have to think longer term. Thus, calculating costs on a yearly basis will help you focus on the relevant time frame. Using yearly cost for your business is just one method, and depending on the purchase or sale decision you have to make, another time frame may be more appropriate. Adjust your time perspective as necessary to ensure you correctly project your finances and make smart decisions.
• Calculate yearly value of clients. Many times in business, you hear talk of lifetime value of clients; for a small business, though, the lifetime value is often uncertain. Get a better metric by using the yearly value of clients. This is easier to estimate and spans a time frame that’s relevant to your business.
• Drive sales with monthly subscriptions. Our monthly subscription-driven world provides a great example for how to use a monthly subscription model to grow your business. This model allows your services to match what your clients are used to from other companies. You may have some clients that turn out to be more profitable, or perhaps you need to raise the price for others. But ultimately, this model should allow you to gain more clients. And remember: This is the only time where monthly is the relevant time frame.
• Calculate your costs on a yearly basis. When you manage a business, you need to calculate yearly costs. Although you likely have a steady flow of revenue, it’s unlikely to be as consistent as someone who works a full-time job. Managing a business is also more emotional, making it easier to make an illogical choice. Having systems in place when purchasing will help you make better choices.
These four concepts should help you successfully navigate the complex world of small-business finances. One topic not covered is forgone interest, or time value of money. A year is typically too short for interest to make a large impact unless you manage millions, which is not the case for small businesses. Don’t overcomplicate this process, or you will fail in its execution. Try to keep your systems simple so they are easy to follow, and reevaluate as needed to make improvements.