Five Frequent Cash Flow Mistakes

Are you prepared to face a cash flow crunch this year? Even a single error in judgement can wreak havoc on a business. In fact, an often-cited Bank study showed that 82 percent of small businesses fail – and cash flow management is usually to blame. Below we list five common cash flow mistakes. Take note so you can avoid falling victim to them.

Poor Record Keeping

Organized and accurate records are vital to managing 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.

Poor Planning

Good Cash flow is all about timing, specifically the timing of your sales cycle. In a perfect world, you would be paid on time by your customers so you have cash available to pay your suppliers when they are due, but typically that isn’t the way it goes. The Credit Protection Association can help encourage payment of your invoices with its unique Overdue Account Recovery System which encourages payment direct to you while maintaining your customers goodwill.

However you will still need a cushion of cash for those times you don’t have enough funds in your account such as when you are tied up on a big job on which you won’t be due to be paid on for sometime. 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 an overdraft facility or emergency funding options 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.

Poor Credit Checks

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. The Credit Protection Association provides its members with credit application forms so they can get the full details for their customer and a promise to adhere to their credit terms. We also provide our Status report system, powered by our award winning credit information provider partner. Our system allows SME’s to access this quality information normally only available to banks and credit insurers. Don’t be afraid to refuse credit to someone who doesn’t warrant it. You wouldn’t hand them a pile of cash, so why give them your work which is just as valuable. If they want your goods or services, then something can be worked out such as breaking up the order into manageable chunks or other payment methods.

Poor Spending

It’s easy to engage in impulse spending, especially during the startup phase. Try not to tie up capital in needless or frivolous expenses. Do you really need that expensive coffee machine? Do you need personalised number plates? When there is cash outflow, the reason why the cash is being spent should be clearly defined and linked to the return they will generate. Implement a policy that requires that all expenses and purchase requests come with a document that requires review and approval by a manager. This will 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 your business’s cash flow is one of the most important parts of your business development. No matter how great your business model may be or how profitable you are, bad cash flow judgements can be fatal for a business. However if you accurately manage your money and improve your liquidity then your business will been given a far greater opportunity to survive and prosper.

James Salmon

6th June 2017