In any business, cash flow is king. A healthy profit doesn’t pay the bills, nor do the assets or equity in your business. Only with a positive cash flow can you pay bills, build income and expand your enterprise.
How can you safeguard against inadequate cash flow or high cash use? Here’s seven of the most common mistakes to avoid:
- Lacking a cash flow strategy
Daily cash flow management is essential to ensure you can operate your business successfully, repay debt and plan for growth. This requires closely monitoring operating expenses, overheads, stock levels, debt collections and profit.
Analysing cash flow regularly will highlight the cyclical highs and lows in your business and industry. This information will help with inventory planning, timing your borrowing, staff hiring and knowing when to boost marketing and promotions. Without regular cash flow management, you’re just guessing.
- Overestimating sales
While optimism is critical for business owners, letting it compromise your objectivity can be dangerous to cash flow. That’s why it’s important to forecast sales in an objective and realistic manner, based on historical evidence and real numbers. By applying quantitative forecasting methods, you can use actual past revenue data from your business or other businesses in your industry to help identify trends and predict future sales. Revenue forecasting can be difficult in your first few years of business, as you don’t have past sales figures to draw from. This is where a good business mentor from within your industry may be useful to help you project future sales.
- Impulse spending
Starting a business involves many beneficial expenses – costs that will boost your company’s profitability in measurable ways. But there are also plenty of consultants, advisors and B2B service providers who will happily take your money for things you don’t actually need. Keep your eye on the bottom line by considering the costs and benefits of every single expense. Along with your revenue forecast, create a realistic budget and stick to it. Plan when your business will break even, and when unexpected expenses arise, go back to your projections and calculate how they will delay your break-even point.
- Being passive about payments
Unpaid invoices are one of the fastest cash flow killers. If you aren’t proactive about collecting payments, you could be on your way to a cash flow crunch. If your clients don’t hear from you the moment a payment is late, they’re likely to pay you last out of all their vendors. Ensure you set clear penalties for late payments. Good policies include a five per cent late penalty when payment is five days late, and work stoppage when 30 days late (for service-based companies).
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5. Outdated payment systems and software
You need to make it quick and easy for customers to pay you. Using cheques is outdated and a waste of time. Allow payments by EFTPOS and credit cards, and ensure you state your account numbers on invoices. Many small businesses have poor processes in place for invoicing, storing data, reviewing invoices sent by suppliers and tracking receivables. Without up-to-date accounting software and or payment systems in place, you risk being paid late, missing receivables and not being able to accurately assess your monthly cash flow.
- Lacking an emergency fund
Cash flow hiccups are a business reality. They may not be a big deal if you have a cushion of savings. But if your company is working from a zero account balance, one slow sales month could spell disaster. To safeguard your business from cash flow issues, maintain an account balance equivalent to at least two months of operating expenses.
- Avoiding your bank
Banks are your most important creditor and they don’t enjoy being surprised with late payments or defaults. Communicating with your bank about how on track you are to make payments can be what saves you from going under. If they see that your cash flow forecasts and business plan are in order, they are more likely to allow an extended payment.
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5 more great cash flow articles to read:
1. Cash flow problems and solutions
2. How to secure a small business grant
3. Small business = big economic impact
4. The 9 most popular sectors for start-ups
5. Does accounting software improve cash flow?