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.
This article will outline eight of the most common mistakes you might be making while operating your business. 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.
Needless to say, an accurate bookkeeping system is crucial in handling your business’s money. 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.
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. 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.
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.
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.
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.