Cash Flow Mistakes and Tips for Avoiding Them
Maintaining cash flow is the most vital part of running a business. It can be the difference between staying open and closing down, so you can't afford to make too many mistakes in this department.
Below are four mistakes that many businesses make. These can be fatal for your business if not addressed, but they can be avoided.
Mistake #1: Not Preparing for Slow Periods
One of the biggest mistakes a small business can make is not preparing for slow periods. You must be able to survive the times when the revenue generation slows down, and part of that is properly managing your cash flow.
According to a survey by Womply, 1 in 5 American small businesses wouldn’t even survive a single month if sales completely stopped. 3 out of 4 would last less than 6 months.
To be prepared, manage your expectations and make the necessary financial adjustments.
Try to project any regular, recurring expenses as well as any irregular expenses that may occur. If seasonality is an issue in your line of business, find supplemental revenue sources that can help ease the financial burden. It is also wise to eliminate or reduce expenses where possible ahead of time. It's better to tighten your belt before things become dire than try to recover from a major hindrance.
Mistake #2: Not Focusing on Accounts Receivable
Late payments are one of the most common causes of cash flow issues, and while you may not be able to completely eliminate them, putting greater focus on accounts receivable can make a big difference.
Be clear about late payment penalties on your invoices. When bills aren't paid promptly, follow-up regularly until they are. If bills go unpaid for an unreasonable amount of time, consider negotiating.
Mistake #3: Not Being Organized Around Cash Flow
Not being organized when it comes to cash flow matters is a good way to let them spiral out of control. For starters, you should be using a software solution to help you manage accounts receivable as well as all of your bookkeeping.
Prepare a cash flow statement and keep up with it regularly.
Mistake #4: Not Having an Emergency Fund
Perhaps the most important thing you can do to plan ahead for potential cash flow issues is having an emergency fund to help you get through the tough times. This may mean making some budgetary sacrifices, but any extra money that you can add to this fund can be a blessing when the cash flow slows. Cut out needless spending and add the saved money to your emergency fund. You may even consider regularly adding some funds from your own salary. This emergency fund calculator might come in handy.
Making the above mistakes can be costly, but they are relatively easy to avoid with some effort. Things aren't always going to work out to perfection, but putting some focus on the health of your cash flow can ensure that your business thrives even when revenue slows.