As a small business owner, you know that cash flow is king. In fact, 82% of small businesses fail due to lack of cash flow, which is why today we’re going to talk about how to increase your access to cash. There are small steps that every small business owner can take to increase access to cash and improve their ability to maintain full liquidity, use, and control of capital when things go awry. Whether that means making payroll, hiring new people, investing in equipment, or investing in new technology, all of these things are inevitable, and they require access to capital.
So how can we position you as a small business owner to take advantage of opportunity rather than become a victim of circumstances outside your control? First and foremost, 90% of small business owners have the majority of their net worth tied up in their business. They take all of their profits and pour them back into the business. That is not necessarily a bad thing, especially in the beginning as you build and establish the foundation of your business. But as time goes by and your business grows, and your access to capital increases because your business is growing, taking all of those profits and dumping them back into the business puts you in a position where you are not in control of that equity. That can actually hold you back, especially when you want to access money from a bank. Banks are not looking at how much inventory you have. They are looking at how much cash you have so they can determine how much they are willing to lend. When you depend on banks for access to capital, there are many hoops you must jump through. You have to disclose your income, your business cash flow, and your business equity. All of these factors are used by the bank to determine whether you are a worthy candidate to repay the loan you are seeking. And the reality is, you are not in control of that process. The bank is. Positioning yourself so that you have liquidity, use, and control of a pool of money will not only make you look stronger to a bank, but it will also leave you in a more secure financial position because you will have access to capital no matter what. It all comes down to control. When you have access to money, you are in control. You are no longer solely dependent on a bank. You can self-finance if you choose, through the capital you have built up. The key is that you positioned yourself to do that.
The second shift most business owners need to make is not placing all of their savings into qualified retirement accounts such as 401(k)s or IRAs. These accounts are restricted, and access to the money is limited. As a small business owner, you already have most of your wealth tied up in your business, and you cannot easily spend equity. Then, in an effort to save for retirement and reduce taxes, you put money into qualified retirement plans. What this often does is leave you without a pool of accessible cash. You cannot access the equity in your business, and now you cannot access your retirement savings either. Life still happens. There are expenses outside the business your family, your home, your spouse, your children, vacations. All of these require access to significant amounts of money at different times. If your capital is tied up in your business and locked away in retirement accounts, you may not have the access you need. As a result, you become dependent on banks and credit companies to fund short term goals and unexpected expenses.
The third shift is to stop taking your profits and paying cash for large purchases. When you pay cash, you may save on interest that you would have paid had you financed. But you are also giving up control of those profits to the vendor who sold you the equipment or inventory. Paying cash can feel good because you eliminate a monthly payment. However, it does not necessarily reduce financial stress. Bills still arrive each month. And now, you no longer have access to the capital you once had available to manage those obligations. You gave up control of that pool of money to purchase an asset, and now you do not have that liquidity to operate and grow the business as smoothly as you might have otherwise.
By making these three small shifts in how you use your money what we call the financial golf swing, you can place yourself in greater control of capital and move from a position of scarcity to one of abundance. It positions you to be in control of money and cash flow, which are both the lifeblood of a small business.
If you would like to learn more about how to put these strategies to work for you, your business, and your family, visit our website www.tier1capital.com and click the “Schedule Your Free Strategy Session” today.
Thanks for reading, and remember it’s not how much money you make, it’s how much money you keep that really matters.