No matter how big a company’s bank balance is or how many digital transactions it clocks daily, having cash in hand for daily activities and expenses is extremely necessary. You need cash for everything from purchasing inventory, paying for storage, employees’ salaries, marketing tools and other running costs such as utility bills or staff coffee machines. Maintaining a healthy cash flow is one task many small business owners struggle with as other strategic activities like growth plans, sales figures, and R&D take priority. Monitoring cash flow is a time-consuming job that needs total attention.
7 Common Cash Flow Mistakes Small Business Owners Can Avoid
Here are some common cash flow mistakes you can avoid from the start to ensure the smooth running of the business.
Common Cash Flow Mistakes: Over-Spending At The Beginning
A small business owner understands that money attracts money, which means spending more on quality at the beginning helps attract more orders and thus more money in the long term. However, this optimism and belief lead business owners to overspend above and beyond their original plan. Some small business owners end up renting much bigger office spaces or company cars in anticipation of future business growth. While there may come a day when your business will reap the fruits of your confident investments, the immediate problem it causes is cash flow shortage. Starting off on the wrong foot this way will only complicate matters for your business numbers.
Common Cash Flow Mistakes: Over-Estimating Future Sales Volumes
Many small business owners overestimate their future sales volumes based on an optimistic outlook. What they don’t realize is that while the goods might be sold in the future, the suppliers, storage facility and other employees have to be paid in the present. This often eats into your cash flow and disrupts the daily business operations. The best way to avoid overestimating sales volumes is by being realistic about your demand and supply statistics. You can use your past revenue records to make a realistic estimate of your sales volumes.
Common Cash Flow Mistakes: Failing To Track Invoices and Payments
One of the biggest cash flow nightmares of any small business is having unpaid invoices from clients. Every overdue invoice cuts deep into your cash flow, creating a ripple effect in your business operations. By hesitating to ask for such payments usually ends up in unpaid bills. You can avoid this with stringent invoicing regulations from the beginning. Sending gentle or informal reminders, followed by firm-sounding ones and finally warning clients of the termination of services if the dues are not paid is the way to go about it. At the same time, to encourage your clients to pay on time, you could also give them small perks or discounts for paying on time. However, be careful about the discount amount as higher discounts will again affect your own cash flow adversely.
Common Cash Flow Mistakes: Overborrowing And Underpaying Debt
The above points, if not tackled in time, can ultimately leave you borrowing money to keep your business running. Every business has its highs and lows. If you end up over-borrowing and face muted demand for your goods or services, the burden on your business will increase. And while everybody wants to clear their debts on time, doing it in a low phase is not easy. Overborrowing and underpaying debt is a vicious circle you can avoid altogether if you keep an eye on your cash flow.
Common Cash Flow Mistakes: Not Keeping A Cash Reserve
As mentioned above, your small business sees many highs and lows on its growth route. While you might need your cash flow to sustain through the low phases, even the high phases can sometimes put a strain on the cash flow. Sudden spikes in demand or an upcoming festive season call for an increase in inventory. In times like these, having a healthy cash reserve can work wonders. It takes the burden off your current cash flow and gives you more time to work on meeting the demand surge without worrying about finances.
Common Cash Flow Mistakes: Failing To Monitor Cash Flow Regularly
This seems like a rookie mistake but is actually a very common one. As business grows, it becomes difficult to monitor every matter yourself. And one of the first things to get neglected is monitoring your cash flow. A cash flow is the health card of your business – it tells you where you’re spending too much or too little. It also helps you spot any anomalies well in advance. In fact, the above problems are reflected in your cash flow and can be nipped in the bud if you stay vigilant. Monitoring your business’s cash flow weekly, if not daily, is one chore you should not skimp on.
Common Cash Flow Mistakes: Not Investing To Grow Wealth
Whether it is personal finance or business finance, making your money grow through investing is a must. By generating a passive source of income, you can give your business finances a leg up and save yourself from many sleepless nights. The sooner you start to invest, the better.
Simple and straightforward as these tasks seem, it can be difficult for a small business owner to look into each matter in depth. Then again, there is also the danger of being tempted to overlook certain red flags in the honest and optimistic confidence that the issues will resolve themselves in the course of time. A professional bookkeeper or accountant can prepare your books, monitor cash flow, make realistic estimates of cash requirements and suggest pragmatic solutions. Remember, a healthy cash flow is key to a healthy business.
Contact McCay Duff LLP in Ottawa for Your Accounting Needs
Hire a professional accountant to outsource your cash flow and accounting requirements so that you can give your business the attention it needs. At McCay Duff LLP, our trained and experienced accountants can provide solutions to all your cash flow-related problems. To learn more about how McCay Duff LLP can provide you with the best accounting expertise, contact us online or by telephone at 613-236-2367.