20 Reasons your business will fail and 10 why it may not: #1 Cash Flow

This is the first in a series of posts that are designed to help business owner’s make better decisions. I truly believe that everything decision you make impacts the company’s success.

Reason #1 Your small business will fail: Not having enough cash to make it through the start-up period, a downturn or to handle a surge in business. This is the number one reason most businesses fail. Cash is king as you’ve quickly learned or are about to. This can be especially tricky if you are starting a new business or have no credit.

What can you do about it?

  1. Start with a budget and a plan, you need to know what your cash needs are on a weekly, monthly and yearly basis. Does your business generate enough cash to operate or do you need additional funding. Too many entrepreneurs get in way over their heads without a good plan.
  2. Download my cash flow spreadsheet and use it daily. However, this doesn’t work if you don’t have an up to date check register. You have to know where your bank balance is at all times. And this doesn’t mean checking your on-line balance every day to see what bounced and what didn’t. You need a foolproof system to make sure you track every single dollar coming in or out of the bank account.
  3. Learn how to leverage cash. Even if you have no credit you can leverage your cash to make it last longer. For example, you may be able to stretch some things out like payroll. If you are paying your employees every week, you may get a reprieve by paying every two weeks. There are lots of strategies you can employ to use your cash wisely and keep moving ahead. See what you can stretch out.
  4. Consider getting a loan from non-traditional sources. Let’s face it banks aren’t giving out loans like they used to, this means you have to find other funding sources. Look into grants or private loans. Do the research and find the cash you need. There are lots of pitfalls here, when you find a source of funding, talk to an unbiased third-party to get another opinion. Loans or investments from family or friends can seem like your wishes have been answered, but can quickly sour the relationship.
  5. Stop buying “things” for your business. If something isn’t generating more business or required to service your clients, you do not need it, do not buy it. Be tough with yourself on this point. We all buy a LOT of things we don’t need, because it’s a write off, because it would be cool to have or because someone has convinced us we can’t live without it. Make this rule: Everything over $500 requires a night to sleep on it before purchase. Impulse buys account for much of our wasted money. Be brutal! If you are especially in financial straits stop the spending, period.
  6. No, don’t pay yourself first. Pay employees and taxes first, pay your vendors second then pay yourself when your company (and you) have earned it.  If you don’t have enough cash to cover employees and vendors you don’t have enough cash for you. This is all part of planning your business cash flow.

Manage cash like a beast and account for it all properly. Failure to get this under control can have detrimental consequences to your business and your personal life. Think you’re out of the woods because you got a loan? Now you have to be even more diligent about controlling costs and tracking it all.


Managing Customer Deposits or Retainers

I get frequent Quickbooks questions and I believe that many users have similar questions. I will start posting answers to these questions in my blog for everyone. This week I received the following question:

Hi Tirena,

Please tell me if you know how to manage this issue. Often times, I get a retainer for a job. We create an invoice and customer pays the invoice. So, QB considers it an invoice paid and the account balance is $0. But, the system should show it as a credit. So, the question is “how do we bill for a retainer and have it show up as a credit?”

Dear Client,

The best way to handle this issue in Quickbooks is one of the following:

First, simply do not issue an invoice. Enter the payment on the customer’s account and then let it show as a credit.

However, customers often need an official document to pay from so you can either;

Enter an estimate or sales order (depending on your version) and then the customer can pay off that document and you enter the payment on the customer’s account showing the credit.


Enter an invoice then void it or right-click on the invoice to mark it as “pending”.

Once you start billing the customer for work, you can enter “real” invoices, then just apply that payment to those invoices. This is the easiest way to handle it in Quickbooks for most users. This method also gives your customer a clear accounting if you printed a statement for them.

Technically, your accountant will tell you, a credit or customer deposit should show up as a liability and then you apply it later. Quickbooks just doesn’t have an easy way to do this. If the retainer will be used up prior to year-end, then using the method above should be just fine.

Otherwise if it carries over or for Financial Statements for outside users (like banks or loans) or tax purposes your accountant has to reclassify it. Again for practical use purposes, using the method above will help to make sure you don’t make a mistake.

The harder, more technically correct way is to issue an invoice and use an item called customer retainer”. That item should be linked to an “other current liability” in your chart of accounts called “customer retainers”. Because until you earn it, it’s not income and it’s definitely not an asset. As you invoice your client for real work or product you can reduce the invoice by the amount of the retainer by either issuing a credit memo or entering a negative line item on the invoice using that same item called “deposit”. Then continue until you use up the deposit.

The only problem with this is you have to somewhat manually track the deposit. It’s all sitting in QB as a lump sum in that “other current liability” called “Customer Retainers” so you have to make sure you review that account regularly.

Either way should get you where you want to be, one is just a little more straightforward than the other. For companies that do a lot of retainers or have construction retention, there are other methods that are more complex than can be covered in a blog post.

Do YOU have a Quickbooks question I can answer? I’ve used Quickbooks since 1995 so there is very little I haven’t seen or fixed.  Send me a question and I’ll post the answer.  Go to the about page and send me a message https://qbmess.com/about/.

Where To Start When Cleaning Up a Quickbooks Mess

Cleaning up  a Quickbooks mess isn’t really any different than cleaning up any other kind of mess.  You start by creating a very specific plan and then work the tasks one by one.  However, order really does matter when starting out.   Sometimes you can’t reconcile one account until another is done. The very first step is to make make a back up and label it “before clean up”. That way if you make a bigger mess, you can start over! The second step is to make sure your chart of accounts is set up correctly. This will help you categorize transactions appropriately.

The third step when I am cleaning up a mess is to try and find the right starting point!  Generally, I try to start at the point of the last tax return filing.  For example: If your taxes are done for 2010 and you have good  beginning balances for banking, then I’d start with Jan 1 2011. However, every mess is unique. Some messes are so big you may have to go back into prior years. After you know where to start, then it’s time to gather all the paperwork.

You’ll need the following (at a minimum):

Bank statements ( for every account, every month), credit card statements (for every account, every month); payroll reports and returns; last tax return; any accountant prepared financial statements; receipts for expenses paid with cash; cancelled checks (unless you have a record of what checks were made out for); deposit records; loan documents; amortization schedules.

Generally,  I would recommend at this point to start posting the bank account transactions and reconcile the bank accounts. However, there may be missing invoices, checks already posted or bills that should be paid versus just writing a check. These are all things a seasoned professional can help you sort out. I’ve coached many Quickbooks users on how to clean up their messes (and keep it from happening again).  I wouldn’t recommend doing this without any support but you may be able do a lot of the legwork on your own with someone to check your work.

Quick Tip: Multiple Bank Accounts? Keep ’em straight with different colors.

If you use multiple bank accounts, you can change the colors so you don’t accidentally use the wrong account. You can also do it just to soften the effect on your eyes or select your favorite color.

How: Click “Banking”-> “Use Register” and then click “edit” (at the top of the screen) and “change account color”. Select the color you want and click “ok”.

Whenever using multiple bank accounts it’s always a good idea to use different colored checks as well. In this case, you can make the color of the screen match your checks. Then,  no more errors in data entry.