How to Keep Your Small Business Financially Fit: A Q&A with Neil Kane, Instructor at Michigan State University

The statement “Cash is king” is popular for a reason: it’s 100% true, especially if you’re running a business. Having enough cash at any given time enables you to run, manage, and grow successfully.

At noissue, we’re all about helping small businesses thrive, which is why we’re thrilled to have Neil Kane on the blog today.

A seasoned entrepreneur who's started about a dozen businesses, Neil is a mentor and coach for SMBs. He’s also an instructor in the entrepreneurship program at Michigan State University, where he teaches courses on small business finance.

Read on what he has to say below.

How to get a handle on your finances: the basics

According to Neil, there are three key pieces of information you need to know as a business owner to effectively manage your finances.

They include:

• Cash in the bank.
• Your account receivables, such as how much money you're expecting to come in from your customers.
• Your account payables, such as how much money you owe to vendors and suppliers.

“The equation is very simple,” he says. “You've got your existing cash, plus the amount that you're expecting to receive, minus the amount that you're expecting to payout. From there, you should be able to do some forecasting.”

It’s easy enough to understand, but Neil says entrepreneurs face issues when money doesn’t come in fast enough or if unexpected expenses arise.

“What happens all the time is your customers may be slow to pay you or an unexpected bill may pop up. This just seems to be a challenge for everybody.”

He continues, "What I just described is just commonly called cash flow, right? Which is understanding the cash on hand and then knowing what's coming in minus what's going out. But where you run into problems is if you're close to the bone and the money coming in is delayed and the money going out gets accelerated. That’s when you wind up in a cash crunch."

How to avoid being in a cash crunch 💳🤑

A cash crunch is a problem that no business wants to have, but it’s an issue that’s incredibly common. Neil says you can prevent it by implementing accurate record-keeping.

“If you don't have a handle on the facts, then there's just no way that you can make good decisions. Unless you have a lot of money in the bank, you won’t be able to ride out the ups and downs of running your business.”

Another way to avoid being in a cash crunch is to stay on top of collections.

“You want to try to collect money from your customers as quickly as you can. Sometimes that means following up, calling, and emailing them. You could also offer a small discount or some other incentive to get your customers to pay early.”

Neil adds, “We all understand the practice of stringing out the people we owe money to because you have to do that to make your money last. The thing is, your customers are also doing that to you on the other side.”

Understand your ecommerce costs 💸

Understanding all the costs that come with running an ecommerce business is a must.

“Whether you're shipping products yourself or you're shipping through a logistics firm, you're paying fees on transactions. You're also paying credit card fees, you're paying fees when people return, and you're paying warehousing fees.”

Neil adds that if you’re selling through an online marketplace, it’s important to take some time to figure out how much they’re actually charging you.

When he ran a business selling on Amazon, he said that he had difficulty predicting the costs from the marketplace.

“How they charge you and what they charge you for is kind of obscure, so we had a lot of trouble really predicting that.”

He continues, “Once Amazon sends you a check, you say, ‘Oh, we made $100 and they sent us $45 so I guess they took 55%.’ They'll do things like they charge you by the cubic foot of how much space you take up in their warehouse. Not everyone knows what that is, so it's hard to predict."

“But you really need to understand these things so you can make decisions about how you can improve your margins.”

Why you should hire a professional 🏦

One of the best ways to stay on top of small biz financials is to hire a professional, says Neil.

“My guidance for small businesses would be to hire somebody or find somebody who can assist them so that they do their bookkeeping properly.”

He continues, “If you don't have a good handle on your finances and if you're not able to do a modicum of forecasting, then you run the risk of just jeopardizing your business… that’s why I'm a big believer in seeking help from a professional. For a modest amount of money, you can get somebody to set up your bookkeeping and do it right in a cloud-based accounting system. And I just think it's money extremely well spent.”

Do note that you don't necessarily have to hand off all your financial tasks to a third party. According to Neil, you can hire someone simply to set things up correctly or to periodically check on your business.

“You don't need to have an accountant do everything for you. This is kind of like with a lawyer. You may need them to help set things up, or maybe you just pay them to review things every month or every 90 days — just enough to keep you out of trouble and to make sure that somebody is helping you anticipate things.”

Small biz financials don’t have to give you a headache 💵

Managing your finances as a small business can feel daunting, especially if you’re a creator or an entrepreneur who just wants to make and sell products.

However, taking the time to understand the basics will ensure that you have a handle on your finances and make smarter business decisions.

And if you have a professional on your side who can oversee your bookkeeping and cash flow, the process of staying on top of your finances will be a whole lot easier.