Business Resources

Solving Money Problems Before They Start


It seems obvious enough, but running out of money is the great killer of small businesses. Sadly, many cash-flow fatalities could have been prevented if only the business owner had been more aware of the money situation and taken some cash-flow precautions.

I've known small business owners whose failure seemed completely unpredictable. At least it was to them. Caught up in the day-to-day drama of running a company, you can lose sight of even the most important things. This is especially true when the immediate challenges of running the business make real planning impossible.

Sadly, sometimes money problems are more apparent to customers, suppliers, and employees than they are to the business owners themselves.

How can you prevent this?

Learn to Love Your Budget

A key difference between successful businesses and struggling ones is their budgets. Not the size of the budget, but whether they have a budget at all.

If you don't have a budget for your business, start working on one. You can come back to this column when you reach a stopping point in your budgeting. This is much more important than reading website articles, even this one.

A well thought-out budget could be your most valuable business tool. Keep it constantly updated and make no purchasing decisions involving more than small amounts until you've checked and, if needed, modified the budget.

The budget you create can be fairly simple or intricately detailed, depending upon your needs. It can be created as a simple spreadsheet or built using an accounting program.

Now you have a budget and you see a serious cash-flow problem ahead. The long-term budget shows that there is nothing fundamentally wrong with your business, but nobody will ever know that if you don't make it through the next few weeks or months.

Here are two creative financing methods that could help you head off such a problem, or prevent it entirely:

  • Trade credit insurance. This is an insurance policy that promises to pay a portion of your receivables even if your customers don't pay. Having this insurance may mean the difference between getting the bank financing you need and remaining chronically short of cash. If you are doing business outside Australia, but your bank is worried your foreign customers aren't credit-worthy or that they cannot verify your receivables quickly and easily, trade credit insurance may make all the difference. This type of insurance is available in many parts of the world. According to the Credit Research Foundation, a non-profit research group, 40 percent of European companies buy trade credit insurance. Ask your insurance broker or trade association if trade credit insurance is right for your business.
  • Factoring. Factors are in the business of purchasing invoices from other companies at a discounted price, then collecting them. A factor will base a decision on the potential income your business has in the form of contracts, receivables and orders from credit-worthy companies. Banks base their lending decisions on your historical payment data. So if you're having trouble getting the financing you need, consider factoring. With a factor, you'll get a percentage of the invoice before your customer pays it, and most of the rest once the invoice is paid. The factor retains an agreed-upon percentage, based on the size of the advance percentage and how long your customer takes to pay. This can be a survival tool for small businesses caught in a cash crunch.
Finally, here's a cash-flow tip that many business owners wish they had thought of, but only after it is too late.

Borrow Before You Need To

There is a saying that banks will only give money to companies that can prove they don't need it. The best way to build a great business credit rating with a bank is to borrow small amounts every 90 days or so.

There is a saying that banks will only give money to companies that can prove they don't need it. The best way to build a great business credit rating with a bank is to borrow small amounts every 90 days or so.

Simply borrow the money, put it in an interest-bearing account, and then pay it all back at least a month before it's due. If you make payments, never make a payment even a day late. Always make them at least a week early.

Six or seven small loans, repaid ahead of schedule, will dramatically increase your borrowing power. The key is borrowing when cash flow is good and you don't really need the money. When you do need money, this will get you more money and generally at more favorable terms.

David Coursey is CEO of his own small consulting business and has written for a number of technology publications, websites, and blogs. Write to him at He's happy to answer reader questions in his spare time.

Reprinted with permission by Microsoft Corporation and the Microsoft Small Business Center. Copyright 2007. All rights reserved.

The information contained in this document, including all instructions, cautions, and regulatory approvals and certifications, is provided by Microsoft Corporation and has not been independently verified or tested by Dell. Dell cannot be responsible for damage caused as a result of either following or failing to follow these instructions. All questions or comments relating to such statements or claims should be directed to Microsoft Corporations.

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