Businesses all over the globe face a common challenge and that is cash flow management. This challenge is more of a worry for small businesses as they have not been in the game long enough to know the ins and outs of managing this extremely essential component. A study conducted by a US bank pointed out mismanaged cash flow as the primary reason behind 82% of business failures! This is quite a high percentage and thus a great concern for the startups and small businesses alike. Cash flow management is a common challenge for small businesses.
Cash flow is essential to maintain the business and keep it running. If your business finances are not managed well enough, you will not be able to hire or pay employees, buy inventory or secure financing. Businesses often need to borrow money for certain projects such as expansion or purchase of essential equipment. If your business does not have a cash flow, the credit score would be poor, thereby reducing your chances of qualifying for the financing of many kinds. That’s why improving cash flow is very beneficial and important in your business.
Cash flow is a problem specifically for new businesses because rookie entrepreneurs may have ideas but they may not be trained in finance or bookkeeping and other financial management practices. Another pressing problem that makes new businesses susceptible to cash flow issues is the fact that cash needs to be injected into a new business in order to make it grow. If you are not smart about it, you may find yourself in dire straits sooner or later. To prevent this, a finance professional or accountant could help find the best business funding to manage cash flow.
At one time of the year, you may have no cash flow problem because of high sales and high revenue, while at another time of the year you may find yourself in a fix by spending too much on inventory and little sales. One has to be extremely smart about cash flow management in order to keep the business afloat. Compiled below are a few mistakes that businesses make when it comes to cash flow. Steer clear of them and you can save your business from sinking.
Impulsive Spending
You cannot make your business successful by using the money to do everything your competitors are doing. You need to have a strategy in place that helps you decide when and what to spend at a specific time. Money begets money is a fatal strategy for businesses in general and small businesses in particular. When you keep using your existing cash without proper check and balance, you are in danger of overspending. If you have not done your proper research before starting a business, there will be many people out there ready to provide their services to help your business get the start it needs.
Initially, if you are low on cash you should not rely on those charging you a hefty amount for services that you can easily take care of yourself. All you need is to manage some time to do a bit of research and you can apprise yourself of most of the things. That is one example of overspending that new businesses fall prey to. You may be inclined to have a bigger office in a high-end locality that requires a chunk of your capital. You will be spending valuable cash on something that can be easily saved if you chose a different location.
Some also splurge a lot of cash on an office interior and then are clueless where the money went. A business’s first concern should be that it should generate revenue. Once it starts generating regular revenue, then the office upgrade should be on the agenda. This kind of impulsive spending damages business and eventually leads to its failure.
Whenever and wherever you are going to spend money, keep a cost-benefit check. How much are you spending and how much will you be getting back as a result of spending that amount. If the spending is continually higher than your benefit, it is time to revise your spending patterns and rethink your business strategy. In order to safeguard your business against impulsive spending, you should formulate a budget that will help streamline your monthly spending and thus stabilizing your cash flow.
Late Invoices
Late payments have the potential of disrupting a company’s cash flow. You are getting the product from the suppliers, sending it to the customers and taking care of all the costs but you are not being paid on time. This delay in payment is mostly because the company fails to send the invoices in a timely manner. It causes an imbalance in the business’s cash flow. You may have money on paper and all the proof of the sales, but no money in your business’s account would give rise to concerns and challenges. Late payment reflects badly on your business and more significantly can get you in a fix. Your growing business may take a dip because of inconsistent cash flow.
The problem of late invoices can be tackled by scheduling. As soon as a purchase is finalized, the invoice for payment should be recorded in the schedule. Having a record is good for follow-up as well. In case a customer is late on the payment, the reminder can be sent to ensure that there is no big gap in the spending and receiving.
Overestimating Sales
Stacking up products or spending on services without any concrete proof that the public will give a positive response is foolhardy. If you spend on your business by estimating that the spent amount will be compensated in sales, it can always backfire. You need to have solid proof in the form of surveys and studies that show that the product or service you are counting on is in demand. People may initially show interest but will not buy your product. In the end, you will be left with things that no one needs.
Spending money aimlessly is the cause of the failure of many businesses. Estimating sales is not a child’s play and numerous factors have to be taken into account before spending precious capital. Forecasting sales is integral to maintain a business’s cash flow. It is usually performed by taking into consideration the previous sales in the relevant industry. If the business has its own figures, it can use them to predict the sales patterns.
Prediction can be problematic as well because you may end up having less or more of the product.
However, the good thing is that the margin is not great enough to damage your business. The difference between overestimating sales and sales forecasting is that the latter is based on real numbers while the former is done without any research.
No Emergency Fund
An emergency fund is your rock to hold on to when you find yourself slipping into an abyss. Anything can happen in the future, from human error to natural disasters.
Unforeseen circumstances can damage your business in a way that you may not be able to get out of the hole unless you have enough capital to get your business back on its feet. A loan is an option in that scenario but you first need to find out if you are eligible for a loan when burdened with losses. A SBA loan payment calculator can give you an estimate to get your business up and running again. A better option than a loan is to have an emergency fund.
Businesses make this mistake of not to create a fund for rainy days. It is not very difficult to set a specific amount for emergency fund every month or quarterly.
In case your business suffers a setback where immediate cash is required, you can utilize your emergency fund cash. You can also find some lenders that can offer you a loan on the basis of your emergency fund. Having an emergency fund will be a testament to your commitment to saving your business. Operating a business without a safety net for your cash flow is going to cause trouble sooner or later. Therefore, always be prepared and invest in creating a safety net for your business.
No Cash-Flow Budget
Your business definitely needs a cash flow budget to keep track of spending and receivables. Even if you are doing everything right but are not managing your cash flow statement you can find yourself at a loss.
There are certain times of the year when your business may have high sales and then there are also times when there is a considerable decrease in sales. If you do not keep track of these inconsistent sales patterns you may not be able to maintain your cash flow. Often times, specifically in the holiday season, you may need a lot of supply but you will not be able to pay for it until you have made some sales.
Having a cash flow budget can help you strategize your payments. You can keep track of when the receivables are higher than spending and when the spending is higher than revenue. It can facilitate you in planning accordingly. Contrastingly, if you have no record, you can make no prediction and thus cause great disturbances in the business’s cash flow. With a cash flow budget, you can request your supplier for late payment with evidence.
In the absence of real numbers, your supplier is unlikely to understand your situation and you end up with penalties on late payments. Resultantly, your relationship with your supplier will suffer and so will your business.