Why Cash Flow Matters More Than You Think
Cash flow is more than just a financial metric—it’s the backbone of your business. Without steady cash flowing in and out, even the most profitable companies can find themselves in financial difficulties. Cash flow management is what keeps your business running day to day, allowing you to pay employees, cover expenses, and invest in new opportunities. When you have a clear picture of your cash position, you can make informed decisions that support your business’s growth and financial stability.
Many businesses focus on profit, but it’s cash that pays the bills. If you don’t have enough cash to cover expenses when they’re due, you risk running into cash flow problems that can threaten your business’s survival. Effective cash flow management helps you avoid these pitfalls, giving you the flexibility to respond to challenges and seize new opportunities. By prioritizing cash flow, you’re not just keeping the lights on—you’re building a foundation for long-term success.
Understanding Your Cash Flow Statement
A cash flow statement is one of the most important financial documents for any business. It provides a clear snapshot of how cash moves in and out of your business over a specific period, helping you understand your true financial position. Unlike the income statement, which shows profit and loss, the cash flow statement focuses solely on cash—what’s actually coming in and going out.
The cash flow statement is divided into three main sections: operating activities, investing activities, and financing activities. Operating activities cover the cash flows from your core business operations, such as payments from customers and payments to suppliers. Investing activities reflect cash spent on or received from buying and selling long-term assets like equipment or property. Financing activities show cash flows related to funding your business, such as taking out loans, repaying debt, or making dividend payments.
By regularly reviewing your cash flow statement, you can spot trends, identify potential cash flow issues, and make informed decisions about payments, investments, and financing. This real-time visibility into your cash flows empowers you to optimize your financial management and keep your business on solid ground.
The Hidden Power of Cash Flow Forecasting
Cash flow forecasting is a game-changer for businesses looking to stay ahead of financial challenges. By predicting your future cash flows, you can anticipate potential cash flow problems before they arise and take proactive steps to keep your business on track. Effective cash flow forecasting involves analyzing your historical cash flow data, identifying patterns, and using this information to project your future cash position.
With accurate cash flow forecasting, you can plan for upcoming expenses, schedule payments, and ensure you always have enough cash to meet your obligations. This level of foresight is essential for managing cash flow, especially during periods of growth or uncertainty. Businesses that rely heavily on effective cash flow forecasting are better equipped to avoid cash flow crunches, make informed decisions, and achieve their financial goals.
By making cash flow forecasting a regular part of your cash flow management strategy, you gain the insights needed to optimize your cash flows, reduce risk, and support your business’s long-term success.
If you’re running a business, no matter how big or small, managing cash flow is crucial for its viability.
It’s not a surprise to hear stories of small business failure due to cash flow. That’s why people assume that the problem mostly has to do with the size of the business. But the reality is, the list of big companies that failed due to poor cash flow is a growing one as well.
You know that in order to pay for supplies, invest in research and growth strategies, and keep the business operating, it’s essential to have sufficient cash flow. Yet this is easier said than done. A common error is mismanaging operating cash flows and not accurately tracking cash inflow from core business activities, which can lead to significant financial issues.
This article will outline eight of the most common errors business owners make regarding cash flow. More importantly, you’ll discover how you can overcome these cash flow challenges.
Mistake #1 – Lack of Monitoring
Without operational cash flow management, it’s practically impossible to keep a business on its feet. That’s why from day one, you have to implement daily monitoring of operating expenses, debt, stock levels, profit, and overheads. Relying on manual processes can hinder your ability to access real time data and timely information, making it difficult to make informed decisions quickly.
Needless to say, an accurate bookkeeping system is crucial in handling your business’s money. Automated systems provide more timely information and real time data compared to manual processes, enabling faster and more confident decision-making. It will allow you to go over cash flow analytics, which can then provide you with insight into the highs and lows in the way your business operates.
It further helps with planning your inventory, getting loans at the right moment, hiring personnel, etc. You’ll also be able to act more strategically about which bills to pay and when.
Without these cash flow insights, all business moves may be a guessing game.
Mistake #2 – Impulsive Spending
One of the most common cash flow challenges arises from spending way more than necessary to keep the business running. Especially in the beginning, a lot of money goes out to consultants, B2B services, or advisors. These businesses will, very often, try to sign you up for services you don’t necessarily need.
You want to be mindful of how you spend money on inventory and services and ultimately create a budget. If you stick to it, you’ll have an easier time planning future expenses. It will also be easier to deal with unexpected expenses by looking at your projections and calculating the effect on your future spending. Accurate forecasting helps improve cash flow by allowing you to anticipate and plan for both expected and unexpected expenses, ensuring your business remains financially stable.
Mistake #3 – Being Late with Invoices
Seeing how profitable your business is on paper may not mean much. But having that money available is a whole other story.
You risk putting your business on the rocks with every missed payment. And living in one of the slowest-paying countries – that is, Australia – puts many business owners at this risk. That’s why it’s essential to have a standard timeframe for invoice and payment collection.
It’s desirable to have a follow-up system to prevent clients from being late on payments multiple times or set penalties for late payments. And for billing customers on the go, you can use various free software for generating invoices.
Mistake #4 – Lack of Emergency Funds
Clients come and go, invoices don’t get paid, debt goes up. There’s no way to know exactly how things will go for anyone’s business in the future. In reality, not everything will proceed as expected, which makes having an emergency fund essential. That’s why having a cash cushion is a must.
In many cases, the emergency fund can prevent a company from going bankrupt.
There are a couple of ways to invest in an emergency fund. You can either make regular deposits into a savings account or apply for credit. The first option is much safer but comes with a more extended incubation period, while the second takes less time but comes at a cost (and risk).
Mistake #5 – Using Outdated Payment Software
How easy do you make it for clients to pay? Do you still use cheques? If so, it’s time to make a payment method shift.
You want to allow EFTPOS and credit card payments and include your account number on invoices.
This is essential to avoid late payments or miss receivables. Also, you’ll be able to predict your monthly cash flow more accurately. But make sure to have up-to-date processes for invoicing, data storage, and invoice reviews. Modern payment systems can enhance cash visibility, giving you real-time insight into your cash position and helping you manage cash flow more effectively.
Mistake #6 – Being Stuck in the Invoice-Marketing Cycle
Many small business owners make the common mistake of completing a job and quickly moving on to search for new clients. But while searching for a new opportunity, the money made from the previous project gets fully spent.
This kind of strategy causes a business to operate from paycheque to paycheque.
As a small business owner, try to always be on the lookout for clients. You’ll also want to stay in touch with existing customers because when they’re ready to buy, they may wish to purchase from you again.
Mistake #7 – Turning Your Back on the Bank
Banks don’t appreciate late payments. It’s essential to stay in touch with your bank and keep them informed about how your payments are going.
If you keep the cash flow forecasts healthy, the banks may give you an extended payment period.
Mistake #8 – Sales Overestimation
Objectivity is crucial for the long-term health of a business. But sometimes, optimism can get in the way, compromising the overall cash flow. That’s why you’ll want to make sure to forecast sales realistically based on past numbers. Overestimating sales volume can lead to cash flow mistakes and financial instability, making it essential to monitor and assess sales volume carefully during forecasting.
Use quantitative forecasting methods to assess trends and predict future sales. But this part can be harder for a new business, as there’s not much data to use as reference. This is when it may be worth consulting a business mentor in the same niche who could help you predict sales with relative accuracy.
Cash Flow and Your Business’s Financial Health
Your business’s financial health depends on more than just sales or profit margins—it hinges on how well you manage your cash flow. Even a profitable business can run into trouble if cash isn’t flowing smoothly. Late payments, unpaid invoices, and slow paying customers can quickly lead to cash flow problems, making it difficult to cover expenses or invest in growth.
To improve your financial stability, it’s essential to have a robust cash flow management plan. Start by creating a cash flow forecast to anticipate periods of negative cash flow and plan accordingly. Review your payment terms to encourage customers to pay faster, and stay on top of accounts receivable to minimize the impact of late payments. Reducing unnecessary expenses and tracking every cash outflow can also help you maintain a healthy cash position.
By focusing on these best practices, you can strengthen your business’s financial health, avoid common cash flow mistakes, and ensure you have the cash needed to achieve your goals. Remember, effective cash flow management isn’t just about survival—it’s about building a business that thrives for the long term.
Keep Track of Your Cash Flow
When businesses fail, cash flow mistakes are often to blame. That’s why it’s essential to have the proper accounting, bookkeeping, and invoice tracking systems. Failure to do so may lead to unpredictable daily cash flow and potentially put your business in hardship.
If you ever need a loan to make up for any shortfall in cash flow, Unsecured Finance Australia can help.
We specialise in unsecured business loans that small business owners can use however they see fit, including covering unexpected expenses or tax debt.
Apply online and you can receive your approval within 24 hours.
