Cash Flow Mistakes to avoid
Avoid making some of the most common cash flow management mistakes and keep your business running smoothly.
In business, cash flow is king. It’s the movement of money into or out of a business and it’s essential to solvency. Having an ample amount of cash on hand solidifies your status with all the creditors, employees, and others can be paid on time.
In today’s tough economic times, avoiding cash flow mistakes is more important than ever.
Here are some of the most common ones:
1. Overestimating Future sales volumes
Estimating future sales volume is the most important task of an entrepreneur. But sometimes it happens that because of optimistic projections, sometimes entrepreneurs tend to predict that sales will reach a certain level. As a result, they overspend for achieving that goal and that could lead you to a shortage of cash flow.
2. Impulsive Spending during start-up phase
Budget planning and sticking to it is very important, as it leads to proper allocation of funds for any future uncertainty. Just make sure that the expenses you are incurring into will benefit your company’s profitability.
3. Tying up all your cash
Liquidity is critical to business survival. Make sure you plan an annual cash budget that takes into account seasonal ups and downs in the business. Avoid buying equipment or making other long-term capital improvements with cash. Rather pay for the equipment or improvements over several years, matching the financing to the life of the asset.
4. Paying creditors too quickly
Meeting your financial obligations as quickly as possible can work to your disadvantage. Many vendors offer 30-day-or-longer payment terms. This is like an interest-free loan, so take full advantage of your creditors’ payment terms.
5. Granting credit too easily
Get complete credit information and credit references from the customer before you make the sale. Don’t think you can’t check references or research payment history because you are a small business.
Pulling credit reports from credit bureaus is a worthwhile expense and one that will protect your business in the long-term. After all, if you are going to offer 30-day payment terms, your customer better be worthy. And don’t be lenient with credit just because a customer is a friend or family member – ever.
6. Ignoring personal cash flow
Apply the lessons you are learning in your business to your own cash flow. Focusing on business goals should not be your only priority as you could seriously damage your own financial future. Make sure that you are building a solid, separate financial foundation outside of the business – a nest egg where you save bonuses or dividends.
7. Not monitoring accounts receivable
One of the biggest mistakes businesses can make is to neglect accounts receivable. Review these at least once a week to ensure that you are receiving payments from customers. If they are taking too long, you will need to take measures to speed up the payment process.
8. Tying up your cash in inventory
Poor inventory management can swallow up a lot of cash and leave the business with more inventory than it needs. Of course, you don’t want to have too little inventory either, as that will leave you unable to fulfill orders.
The key is to accurately forecast sales, which can be used to predict the required inventory levels. You can also try inventory management practices such as just-in-time inventory management, where the business procures inventory just in time to make the sale.
- Posted on Jul 25, 2017
- By Dhruv
- 0 Comments