Is your business prepared to face a cash crunch this year? Even a single cash flow misstep can wreak havoc on a business. In fact, an often-cited U.S. Bank study showed that 82 percent of small businesses fail – and cash flow management is to blame. Take a look at these 5 common cash flow mistakes so you can avoid falling victim to them.
Poor Record Keeping
Organized and accurate records are vital to knowing the financial health of your business at any given time. Learn how to track your cash flow in a smart way; technology can help streamline processes and even automate some tasks. Many small business owners opt to outsource business tasks due to the demands and stress of doing it all themselves, and outsourcing accounting and financial responsibilities to the professionals can take a big weight off your shoulders.
Cash flow centers on timing, specifically the timing of your sales cycle. In a perfect world, you could align the timing of your payments with your receivables so cash always came in before it went out, but typically that isn’t the way it goes.
You must have a cushion of cash for those times you don’t have enough funds in your account. The amount of money you need varies – but start by thinking about how much cash you would need on hand if your biggest client delayed its payment to you by a couple weeks. Many businesses opt to apply for a merchant cash advance to provide them with working capital in the event they come across a temporary financial hurdle – but you should have some money set aside too.
Businesses often want to grant credit to customers without due diligence, especially if it means a big sale, at least on paper. Before granting customer credit, it’s essential to check the prospective customer’s credit history. You can ask for references from a supplier the company used to work with, or run an official credit check on individuals. Don’t be afraid to call the references to ensure the potential company or customer made timely payments.
Poor Spending Habits
It’s easy to engage in impulse spending, especially during the startup phase. Make sure you don’t tie up capital in needless expenses. When there is cash outflow, the reason why the cash is being spent should be clearly defined. Implement a policy that requires that all expenses and purchase requests come with a document that requires review and approval by a manager. This is a surefire way to decrease unnecessary purchases. Keep in mind that all expenses are not created equal. If you want your business to make money, use the cash to grow your business and keep your eye on the bottom line.
Poor Inventory Management
While optimism is a common trait among all successful entrepreneurs, letting it compromise your objectivity is dangerous to your cash flow strength. Every potential customer won’t make a purchase, so be realistic based on past sales. This can help you best predict future sales so you don’t poorly manage inventory. Over-ordering products means you wrap up a lot of cash in inventory that you don’t need. Revenue forecasting is difficult during the first couple years you’re in business because you have fewer experiences to reflect on. It’s important to find a happy medium – if you don’t have enough inventory, you may find yourself unable to fulfill orders or provide the services people want. Figure out how to accurately forecast sales so you can ensure you have the right level of inventory at any given time.
Effectively managing business cash flow is one of the most integral parts of business development. No matter how great your business model may be or how profitable you are, cash flow missteps can be deadly for a business. Learn how to accurately manage your money and improve liquidity issues so your business will survive and prosper.