Being a small business owner can be overwhelming as you have to learn new things. You need to understand marketing, finance, laws, and taxes of your business. With so many things to handle, it is easy for a new business owner to make mistakes. You should rectify those mistakes before they spell doom for your business. 

The most common reason small businesses fail 

Many business surveys have found that cash is the most common reason businesses fail. A gap in how much cash you have and how much you need, how to use existing cash optimally, and raising cash are root causes of all cash flow problems. 

Poor cash management can leave you with unpaid bills and salaries and insufficient cash to manage business orders. Many business owners make the mistake of putting their own money to meet the cash crunch, which can exhaust their personal finance and leave them living off debt. 

Cash flow management is important to sustain the business. It involves maintaining books of accounts, analysing them to create a budget, monitoring it regularly, short and long term forecasting, and having a contingency plan. That seems like a lot of work, but it can be integrated and help you in other business activities. 

In this article, we will look at some common cash flow mistakes and how you can avoid them. 

1. Failing To Monitor Books Of Accounts For Cash Flow 

The problem begins when you slack off from monitoring your accounts. Your books and cash flow statement give you true picture of your business. Many business owners make the mistake of confusing profits with cash flow. 

There are loss-making businesses with positive cash flows and profit-making ones with negative cash flows. For instance, a newspaper receives a 12-month advance subscription which significantly increases its cash flows in a particular quarter, but revenue recognition happens over 12 months. If it spends lavishly, giving away free subscriptions or very high discounts, it won’t be able to sustain those expenses every month and face a crash crunch. 

You can avoid this by forecasting the consequences of such lavish expenses and their impact on the available cash in hand. While determining your available cash in hand, deduct current expenses and future costs like tax. If you are a startup, you might not make revenue initially, that makes cash planning crucial.  

The books of accounts will give you a red flag when your expense is higher than your cash. You should determine the next steps for red flags, like using long-term cash reserve, growing revenue, or optimizing cost.

2. Failing to Focus on the Timing of Receivables and Payables 

Every business has a cash flow cycle, where you spend money (payables) to deliver services and bill your clients. This money needs to come back to you as receivables within a stipulated period. Delays in receivables will reduce your cash balance, and after a point, you will face a cash crunch to pay your vendors and employees. 

Many businesses ignore late payments that disrupt cash flow cycle. If you maintain your books monthly or weekly, your bookkeeper will highlight any late payments.

Solution – You have to devise a 3-4 part action plan to follow up with clients on late payments. Some ways of chasing your client for payments are giving payment reminders, rewarding clients with discounts for early payments, and imposing penalties for late payments.  

Timely payments keep cash flows smooth and business sustainable. 

3. Expanding Too Quickly Without Proper Planning 

There are times when your business goes through growth spurts. Small business owners spend expansively in a growth spurt to hit when the iron is hot. They might go over budget and offer longer terms of receiving payments to win over the client. It is normal to be overwhelmed by a large client and miss out on details like timing of the receivables and payables or regular cash flow monitoring. 

Ignorance can have a significant impact on the liquidity of your business. For instance, Amy manufactures packing paper. She gets a long-term contract, and her sales double. In all the hush push, she fails to plan her working capital. The client makes payment every three months, and she manufactures two month’s orders in advance, creating a gap of five years. The gap strains her working capital and her long-term cash reserve. 

Solution – While fast growth is good, take time to sharpen the axe and plan out the cash flow. If you overcommit, set up short-term credit facility with the bank to keep your cash flowing. But timely pay-off the debt. 

4. Not Having Enough Cash Reserve For Grey Days 

So far, we discussed cash flow cycle and working capital to keep business operations running smoothly. But not every day is sunny. Every business goes through ups and downs. So while cash flows are for the ups, cash reserves are for the down period. Many businesses closed during the pandemic as lockdowns exhausted their cash reserve and pulled them into debt. 

But it taught us that a business needs to be prepared and have a contingency plan. One plan is to have enough cash in the long-term reserve to manage six to eight months of business expenses, considering there is little to no revenue. 

Solution – When business is profitable, set aside a portion of your cash flow in the long-term reserve. You can invest some of that reserve in instruments that generate passive income. Ensure you create a separate bank account for the cash reserve to avoid spending emergency money on aggressive growth plans.

5. Failing To Hire a Professional Accountant 

All the things that we talked about are not a one-person show. Many small business owners make the mistake of DIY accounting to save the fees of a professional bookkeeper and accountant. But the accountant gives you way more than the fees. 

Solution – Time is money. A bookkeeper prepares your ledgers daily, weekly or monthly and reconciles them with bank statements to identify gaps. The bookkeeper monitors your cash and expenses and flags concerns like late payments, over-budgeting, and cash problems. Your accountant can study your financial statement, help you prepare a realistic budget based on current expenses and identify areas to reduce costs. Moreover, your accountant is well versed with tax laws and can guide you on saving tax.  

Contact McCay Duff LLP in Ottawa to Help You With Cash Management 

Most businesses don’t realize they have a cash flow problem until it is too late. Talk to a professional accountant to get a cash flow check-up of your business and help you prepare accurate books of accounts. At McCay Duff LLP, our accountants and bookkeepers can provide services such as cash flow analysis and help you devise strategies for sustainable growth. 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