Here are the top 7 cash flow mistakes that can cripple your small business
[et_pb_section fb_built=”1″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_row _builder_version=”4.9.10″ _module_preset=”default”][et_pb_column type=”4_4″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_text _builder_version=”4.9.10″ _module_preset=”default”] All businesses run on cash. Managing money is an essential skill that all business owners should hone as the business progresses in its lifecycle. Small business owners are often caught in a bundle of activities aimed towards business growth, with very little time or money to assign resources towards monitoring their cash flow. At this stage, there are many chances to derail your business due to mismanagement of cash. According to a report from CBInsights, 29% of businesses fail because they run out of cash. Some common mistakes that can lead to cash flow issues include forced growth, miscalculation of profits, insufficient planning for a lean period or crisis, problems collecting payments and more. The first thing that illustrates a problem with cash flow is a dip in sales and a stagnant inventory, both of which directly affect your revenue. Poor money management and forecasting can lead to multiple cash flow gaps in your business, ultimately preventing you from paying your bills on time. [/et_pb_text][/et_pb_column][/et_pb_row][et_pb_row _builder_version=”4.9.10″ _module_preset=”default”][et_pb_column type=”4_4″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_image src=”https://finance.zohocorp.com/wp-content/uploads/2021/07/article.png” alt=”cash flow” _builder_version=”4.9.10″ _module_preset=”default”][/et_pb_image][/et_pb_column][/et_pb_row][et_pb_row _builder_version=”4.9.10″ _module_preset=”default”][et_pb_column type=”4_4″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_image src=”https://blog.gotmenow.com/wp-content/uploads/2021/06/Make-payment-collection-a-breeze-with-Zoho-Invoice.png” alt=”How can I convert an estimate into an invoice?” title_text=”Make payment collection a breeze with Zoho Invoice” url=”https://go.zoho.com/HzZ%20https://go.zoho.com/KwD” url_new_window=”on” align=”center” _builder_version=”4.9.3″ _module_preset=”default”][/et_pb_image][/et_pb_column][/et_pb_row][et_pb_row _builder_version=”4.9.10″ _module_preset=”default”][et_pb_column type=”4_4″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_text _builder_version=”4.9.10″ _module_preset=”default”] For your business to succeed, you must check for short term and long term solutions to avoid running into financial problems. Good cash flow management will ensure that you have enough cash to pay your employees on time, purchase inventory to fulfill your orders, have ample stashed in bank account as reserves, all while carving out an efficient way to collect payments before the due date. This will eventually prevent you from overspending and help you with your businesses’ growth plan. In this article, you will read about common cash flow problems businesses face and what you can do to save yours from a pool of debt. Common cash flow mistakes to avoid 1. Not monitoring financial statements Financial reporting is the method of monitoring financial statements at defined time intervals. A cash flow statement is a financial statement that gives you a detailed insight of your company’s expenses. Investors and other stakeholders rely on this document to judge the value of your business. When you do not monitor your financial statements regularly, you create chances for misinterpreting your businesses’ progress, which may lead to bad decisions. To avoid roadblocks due to cash flow, you must prepare a cash flow budget to predict future earnings. Good predictions are only possible when you have clear financials that are reconciled frequently. 2.Confusing cash flow with profit Business owners are always on the lookout for that one key metric to understand the financial health of their business. In such situations, cash flow and profit are often pitted against one another. Cash flow is the net income of cash moving in to or out of a business at any given time. Profit is the money that remains when you subtract the operating expenses from revenue. It is possible for your business to be profitable and still have negative cash flow keeping you from paying regular expenses and creating hurdles in your growth plans. Your business can also have a positive cash flow and yet find it hard to make a profit (usually the case in start-ups and scaling businesses). Cash flow and profit are not the same, and it is important that you understand the difference between the two before you make any important business decisions. For example, assume that you purchase wooden chairs for Rs 6000 at a 40% margin and sell it for Rs 10000. You can assume that you are making 40% on every sale, after considering minor expenses. However, at the end of a quarter as you prepare your balance sheet, you could be surprised at the losses your business made. In your calculations you did not consider a variety of costs like transaction fees, shipping costs, and costs of storing and returns (which might have been different for each sale). You could have easily assumed that you are making a profit every transaction, but after including overhead costs you can see the business actually took a loss. When your business cannot keep up with the losses, it becomes difficult to fulfil the cash commitments, leading to a cash crunch. Forecasting the consequences of such expenses is a necessary step and can be helpful in determining if there’s enough money in the bank account to meet all your expenses. For a healthy cash flow, you must first subtract your current expenses and future costs, like tax, from your revenue. Your business will only be profitable if there’s any money left after this. [/et_pb_text][/et_pb_column][/et_pb_row][et_pb_row _builder_version=”4.9.10″ _module_preset=”default”][et_pb_column type=”4_4″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_video src=”https://youtu.be/4g9T20wRdio” _builder_version=”4.9.3″ _module_preset=”default”][/et_pb_video][/et_pb_column][/et_pb_row][et_pb_row _builder_version=”4.9.10″ _module_preset=”default”][et_pb_column type=”4_4″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_text _builder_version=”4.9.10″ _module_preset=”default”] 3.Unprepared for the lean period Rainy days are inevitable in a business. You may not get payments on time, have insufficient cash to pay your dues, have to suddenly invest in repairing expensive equipment or lose customers during a crisis. Such excess expenses combined with insufficient financial reserves can drive your business bankrupt. Planning the cash flow for your business is always worth the time. As a short-term plan, you can consider stashing away some money as a cash reserve. Financial experts suggest that you can ideally set aside three to six months of your company’s regular expenses as cash reserves. Of course, the best way is to find out your business needs and analyse your financial statements before fixing an amount. You must also have a long-term cash flow outlook. This will help you forecast the cash required for business operations over a period of two to five years. The best place to start would be to monitor your current income and expenses. Here are a few things you can do to save up: Set a monthly goal and set aside that amount every month. Maintain a separate account to prevent from spending it elsewhere. Always try and cut down on
Read MoreFrom Negative to Positive: How to Improve Your Cash Flow
[et_pb_section fb_built=”1″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_row _builder_version=”4.9.10″ _module_preset=”default”][et_pb_column type=”4_4″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_image src=”https://blog.gotmenow.com/wp-content/uploads/2021/06/Make-payment-collection-a-breeze-with-Zoho-Invoice.png” alt=”How can I convert an estimate into an invoice?” title_text=”Make payment collection a breeze with Zoho Invoice” url=”https://go.zoho.com/HzZ%20https://go.zoho.com/KwD” url_new_window=”on” align=”center” _builder_version=”4.9.3″ _module_preset=”default”][/et_pb_image][/et_pb_column][/et_pb_row][et_pb_row _builder_version=”4.9.10″ _module_preset=”default”][et_pb_column type=”4_4″ _builder_version=”4.9.10″ _module_preset=”default”][et_pb_text _builder_version=”4.9.10″ _module_preset=”default”] What’s more important than profits? Cash. Your profit margins can change at any time, but your cash flow determines your business’s current and future health. Cash flow is the money that flows in and out of your business, and is a crucial indicator of its financial health. Any business may be at risk of poor cash flow, and if its major causes are overlooked, the business may become unprofitable, dwindle further, and have to shut down. Knowing what can affect your business’s cash flow and how you can limit unnecessary cash outflow will help you manage it consistently, prepare for challenges, and grow steadily! Negative cash flow: how it can affect your business Negative cash flow is when your business spends more than what it receives, but this need not always indicate a loss. For example, your payments may be due before you receive your income and you may spend more than what you have at that time, leading to a cash flow problem. So, while you may recover your money later, or even if you’ve already been profitable, there will be certain months where you’d be spending more than your earnings. This can prevent you from having enough cash for future investments, leading to an imbalance in your revenue along with a decrease in your liquid assets. If you don’t manage your cash inflow well to face unexpected expenses, you may have a cash flow crunch. To tackle this problem, you have to understand what’s causing the shortfall. Common causes for negative cash flow Inefficient management: Poor productivity and marketing strategies can make you spend a lot without receiving adequate returns on your investment. For instance, your staff may be focusing on tasks that could be automated, or your marketing strategy may not be effective enough for your target audience. These may lead to high operating costs, as well as poor sales and credit ratings. Incorrect pricing: Undercharging or overcharging is another common reason for negative cash flow. If you have low profit margins, you might want to raise your prices. However, charging excessively for something that customers can get for a lower rate (with the same quality) will only discourage them from buying from you. Similarly, not charging enough can lead to lower returns, and will not improve your position in the market. Late payments: The more complicated your invoicing and payment process, the later your payments are likely to be. Delayed payments can hurt your cash flow, and affect your ability to pay your own vendors, pay for overhead expenses, and much more. Unnecessary investments: Investing too much on products or services that aren’t critical to your business can affect your cash flow. When you do this, you’re spending on non-essential assets that won’t give you much returns, leading to your funds getting drained. Improper planning: Failing to set long-term goals, expanding too quickly, or not having the right employees can impact your future opportunities and your brand image, all of which will hit your revenue. Things may look up temporarily, but you may not have enough resources to give you good returns. Poor financial planning will leave you short of funds when you have unexpected expenses, and you may become too dependent on loans without having enough cash to repay them. Managing poor cash flow is important, but so is steering your business towards consistently improving your revenue. Here’s how you can do both, in two stages. Stage 1: Survival strategies to manage poor cash flow Money matters Record and review your operating expenses and financial statements on a bi-weekly or monthly basis (depending on the size of your business), so you’re always updated on where your money is going to or coming from, and you can take action accordingly. You should also run a cash flow statement because this will help you understand how well you’ve been managing your cash flow. To prepare for the unexpected, you can keep aside a certain amount of cash every month as a cash buffer. This amount can be determined based on your general expenditure, your current and past performance, and how quickly your products get sold. If your overall performance is slow and indicates that you need more money for an emergency, you need a bigger reserve. If you can’t do this and urgently require cash, invoice factoring (selling unpaid invoices to companies in exchange for immediate cash) may help you get cash right away. However, the factoring company will take a cut of the money you earn. Alternatively, you can opt for a business loan. Ultimately, be mindful of the amount you spend during this period, and cut down on unnecessary expenses. If you need to pay for a business expense, prioritize the resources that will help you improve your cash flow and grow your business (whether long-term or short-term). For instance, if you had to choose between revamping your office space and purchasing new software to help your business processes, the latter would be far more beneficial. Avoid delayed payments Send out invoices as soon as possible and have a written record of your payment terms and conditions so your customer knows the consequences for not paying promptly. You can also incentivize them for prompt payments, or, if they opt out of cash payments, check their credit score to ensure they have a reliable record. In case you want to make a sale to a customer who doesn’t have a promising financial history, do so at a high interest rate; they’ll buy only if they really need to and it’s more likely that you’ll get your money back. Meanwhile, ask your vendors if they can extend the payment terms, and regularly check your AR aging report. This will provide details of payments that have crossed the due date, so you can follow up
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