Good cash flow is essential to the financial health of your business. In finance terms, cash is comparable to food. Without it, your business will run into many health problems and may even starve. Cash flow problems are one of the main reasons that small businesses fail. So you need to make this a priority.
This list of common cash flow mistakes will help keep your company in good financial health.
1. Unrealistic Budgeting
Many small business owners underestimate how much it costs to get started. This can lead to an array of cash flow problems. If in doubt, always overestimate your costs to avoid any nasty surprises.
If you don’t know how long it will take for your business to make a profit, you may face some serious cash flow problems. It’s important to create a realistic time frame for your business to reach profitability. Remember to account for seasonal peaks and troughs, too.
Many small business owners delay hiring an accountant until after they launch. But working with an experienced accountant will help you to create a realistic budget. This will save you a significant amount of time and money in the long run.
2. Not Creating a Cash Flow Budget
As well as a business budget, you should create a separate cash flow budget. You need to understand when money will be flowing in and out of your bank account and be able to plan ahead. Money tied up in unpaid invoices is no good to you when your suppliers need payment right now. You must always have enough cash to continue operations, so creating a cash flow budget is vital.
3. Slow Invoicing
One of the simplest ways to ensure a healthy cash flow is to get paid on time. Of course, this isn’t always 100% within your control. But there are plenty of things you can do to encourage your clients and customers to pay you faster.
First, when onboarding a new client, spell out payment details straight away. Then everyone knows what to expect. You should both understand:
- Who will handle the invoice
- When will it be sent
- What are the payment terms
- The method of payment.
It’s also worth checking who you should contact to handle any potential problems that may arise.
Second, send invoices on time and ensure that all the details are correct. This will prevent a time-consuming back-and-forth communication to straighten out any mistakes.
Finally, keep a close eye on deadlines. And don’t be afraid to send out a polite but firm reminder to customers who are cutting it fine. You may also want to consider introducing a late payment charge to incentivise them to cough up on time. But be sure to give your customers plenty of notice.
4. Not Having a Cash Reserve
Having a cash reserve is imperative for good cash flow management. But many business owners skip this crucial step and then find themselves in hot water later on. All businesses will experience unforeseen costs. And it’s important to prepare for this by creating a cash reserve. This way, you can smooth over any cash flow issues without going into debt. or suffering an extreme amount of stress.
Maintaining a healthy cash flow is one of the most difficult parts of running a business. But it’s also important to the financial health of your company. Plan ahead, and create a realistic budget to help you avoid overspending. Remember, cash flow and profitability are not the same thing. So it’s prudent to create and track a separate cash flow budget, too. You can’t overstate the importance of good cash flow management. So when in doubt it’s always best to defer to a quality accountant for help with this essential process.