by Daria Steigman

Anyone who has built a successful business knows that entrepreneurship involves more than just identifying a saleable product or hanging out a consulting shingle. It takes a business mind, long hours, lots of sweat equity—and a healthy dose of financial risk management, which brings us to the topic at hand.

This column looks at the financial side of running a business. The aim is to reiterate the importance of some things you’re hopefully doing already and maybe give you some new ways to think about managing your cash flow and taming your business expenses.“People in small businesses often underestimate their need for cash,” says Anita Campbell, entrepreneur, business speaker, writer and CEO of the popular web site Small Business Trends. “And the No. 1 reason that many businesses fail is that they run out of money.

Here are seven tips for managing the financial side of your business like a pro:

1. Get organized.How can you analyze or forecast anything if you don’t know where you stand today? You must have a way to track your financials, whether electronically or using a paper ledger. Campbell notes that there are dozens of bookkeeping and accounting software products and online applications, including QuickBooks, Outright, Less Accounting and IAC-EZ. I use Quicken to set up “Income” and “Expenses” ledgers, which lets me identify where my money is going, run regular profit and loss reports, and quickly organize everything for my accountant at tax time.
2. Scour your reports. Once you are set up to produce budgets, expense reports and sales forecasts, read them. “The more you study your financial reports, the more you will pay attention to the numbers,” says Campbell. “It’s important to stay on top of your business finances so that you know what’s coming down the pike and will have no surprises.”
3. Budget for your expenses. “The more you can budget and forecast, the greater your chance of success,” says Campbell. She recommends that all small business owners have a cash reserve of at least two to three months (six months is ideal). Furthermore, put the money in a savings account so it’s mentally gone. We budget for personal expenses (from your kid’s summer camp to a new car), so why don’t more small business owners stash the cash for office equipment, quarterly tax payments, business conferences and other major expenses?
4. Create a “cash out” calendar. What do you pay every month? Every quarter? Once you have your system in place, set up calendar entries to remind yourself to pay office rent (if any), mobile, broadband and other recurring expenses on time. If you are late paying your quarterly taxes, for example, you could wind up owing steep penalties.
5. Understand your cash flow. Cash flow is as much about what’s coming in (income) as what’s going out (expenses). Three things to consider here are: the type of clients you have, the kinds of projects you do, and payment processing times. If you do mostly retainer work or your client mix is composed of companies with a track record for paying you every 30 or 45 days, then your income stream is probably pretty predictable. But what happens if you’re a subcontractor and the primary contractor refuses to pay you until they get paid? Or say you’re going after a big project with a big company. Sure, the payoff may be big, but the lag time from proposal to decision could be three to six months. And maybe it takes them 60–90 days more before they pay you that first installment. It once took me almost six months to get paid after a major organization with a track record for paying me on time was audited and new bookkeeping systems had to be put in place. Guess who got caught in the middle? One more thing to consider here. If you’re relying on a few large clients to pay your bills, you might want to consider diversifying. Can you pick up small projects or create a secondary revenue stream to build in more predictability and less risk?
6. Be smart about your spending. “Thanks to the Web, there are more discounts for business products and services than ever before,” says Campbell. Look for coupons and discount codes before you buy. Don’t forget to run a Google search for a product plus “discount” or “coupon.” Campbell also advises small business owners to look at their vendors and see if they offer discounts from their partners. She saves five percent when she purchases AirTran tickets using her American Express card. What can you save by being a savvy business shopper?
7. Your opportunity costs matter. If you have a client who micromanages you or calls every five minutes, or you are otherwise spending time on low-margin work, it may be time to cut your losses and look for something else. “You may not feel like you have that option, but you do,” stresses Campbell. “It can be scary to turn down work, but sometimes you have to do it because there’s a better opportunity out there that you should be focusing on.” The same holds true for pricing. I’ll always negotiate over the scope of a project, but not over my rates. Because being a business owner means being smart, understanding your options and seizing the right opportunities.

This article first appeared in IABC’s CW Bulletin.

Daria Steigman advises clients on business and communication strategy. She also blogs about business, entrepreneurship and social media on her Independent Thinking Blog. She can be reached at + 1 202.244.7651 or [email protected]. Or connect via Twitter: @dariasteigman.