Without cash flow, your business won’t get very far. You might have impressive sales to brag about, customers returning time and time again, and a profit that looks great on paper. But, if your cash flow isn’t, well, flowing, your operations, growth and success can be at risk. In fact, poor cash flow can be enough to cause your business to fail completely. This is why it’s so important to manage cash flow correctly.
When you know exactly where your money is coming from and where it’s going, you can make informed decisions, take advantage of growth opportunities and give your business the best shot at overcoming unexpected setbacks. But, before you benefit from effective cash flow management, there are some cash flow mistakes to avoid along the way.
5 Common Cash Flow Mistakes
Relying Too Much on Credit, Loans or Debt
It’s not uncommon for businesses to use loans or credit cards, and there’s nothing wrong with that. But, relying too much on credit to cover operational costs is a mistake. Though credit can provide short-term financial help, it’s not a sustainable cash flow strategy. Relying on debt, credit and loans quickly becomes expensive, and paying the interest will eat into your cash reserves. Not only does this make it harder to pay off the money you’ve borrowed, it also limits your flexibility and makes it harder to fund business growth.
Here’s How to Avoid Making That Mistake:
Instead of getting into debt to cover day-to-day spending, reserve it for bigger expenses, such as buying new equipment. Building up a cash reserve will reduce your need to rely on credit for everyday expenses, saving you money on interest, and ensuring you have funds to take advantage of growth opportunities.
Not Sending and Chasing Invoices Quick Enough
With a lot to keep on top of as a business, it’s not uncommon for invoicing to be delayed, either because chasing invoices isn’t a priority or you’re offering payment terms that are too long. These delays can disrupt cash flow, meaning that your business has to cover operational expenses before being paid. If this continues, you might find yourself having to borrow money.
What’s the Solution?
It’s important to send invoices promptly, as delays in invoicing can push payments back. It’s also a good idea to set clear payment deadlines – such as insisting people pay within 30 days – and make sure customers know your terms. Keeping on top of invoicing and collections can be time-consuming, but accounting software can send automated reminders for upcoming and overdue payments, so you don’t have to remember to chase payments.
Overestimating Sales and Underestimating Spending
There’s nothing wrong with being optimistic and hoping for the best when it comes to your business. But, don’t be overly optimistic when it comes to sales, especially if you’re also underestimating your expenses. This will create a significant gap between the cash flow you’re expecting and your actual cash flow, leaving you scrambling around trying to make up the difference. Instead of basing decisions and spending on a best case scenario, be realistic. You don’t want to commit to spending before you’re paid.
What Should You Do Instead?
It’s a good idea to base your cash flow predictions on past performance and realistic assumptions, not on what you’re crossing your fingers and hoping for. Get into the habit of updating your cash flow plan monthly or quarterly to reflect real time performance.
Getting Profit and Cash Flow Confused
It’s not uncommon for business owners to assume that profitability is the same as having a healthy cash flow. But, they’re not the same. Profit is the difference between revenue and expenses over a set period of time, whereas cash flow tracks the actual money flowing in and out of the business. If you confuse the two, you run the risk of overspending or taking on expenses you’re not currently able to afford.
What’s the Answer?
You can avoid this cash flow mistake by reviewing your cash flow statements regularly, and comparing them with your profit and loss statements. It’s also a good idea to maintain a cash buffer – for most businesses, a buffer of between 3 and 6 months expenses is ideal, though it’s always helpful to have more – in case of unexpected expenses or slower months.
Not Factoring in Seasonal Fluctuations and Unexpected Costs
Regardless of the industry that you’re in, you’re bound to experience a seasonal dip here and there. If you’re lucky, this will be balanced out by high sales at other times, but it can leave you short of funds in the meantime. You’re also likely to find yourself faced with sudden expenses that you hadn’t planned for – like unexpected equipment repairs or the price of raw materials going up – which can also create cash shortfalls. This can make it difficult to pay staff and suppliers, which negatively impacts your business’ reputation.
Here’s How to Overcome This Hurdle:
Planning for seasonality should be a key part of your cash flow management. Plan cash flow for both high and low seasons, saving additional cash in high seasons, so you can use it when money is tight. Prioritise having enough to cover 3 to 6 months of operating expenses, which should give you enough to weather unforeseen events.
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Without cash flow, your business won’t get very far. You might have impressive sales to brag about, customers returning time and time again, and a profit that looks great on paper. But, if your cash flow isn’t, well, flowing, your operations, growth and success can be at risk. In fact, poor cash flow can be enough to cause your business to fail completely. This is why it’s so important to manage cash flow correctly.
When you know exactly where your money is coming from and where it’s going, you can make informed decisions, take advantage of growth opportunities and give your business the best shot at overcoming unexpected setbacks. But, before you benefit from effective cash flow management, there are some cash flow mistakes to avoid along the way.
