Question added to topic Money • December 3, 2008
How does a small business owner set aside enough money to actually make a profit?
When we receive payment from a customer we usually have a bill or payroll to apply it to. If not, there is always something on the line of credit. Invoices being paid do not always have a corresponding accounts payable (on labor only jobs) but we may have an outstanding A/P from another customer whose is late paying. We know we are profitable but without borrowing on the line of credit, we do not have cash in hand to allow the owners to take a distribution.
The key is having a budget and ensuring that your pricing model enables you to cover your direct and indirect costs, loan repayments as well as distributions to the owner. Cash is King...work with vendors on extending payment options as well as have processes in place to get payment from clients in a more prompt manner (deposits, shorter time span upon completion of product/service). Then the key is cutting expenses and owner distributions so that you can start to build a cash reserve.