The Top Cash Flow Mistakes Small Businesses Make and How to Avoid Them
BY NICK DJUROVIC
CEO of Digital Dot New York
For small businesses, cash flow is an essential part of keeping their business afloat. Making mistakes in the way you manage your finances can put the future of your venture at risk. However, if you proactively manage your funds and resources, you can ensure financial success. The key to developing a successful cash flow plan lies in being able to identify potential mistakes you may be making - as well as how best to correct them. For this reason, we have created this article with entrepreneurs in mind. We are going to give you insight into some of the top cash flow mistakes small businesses make and how to avoid them. So, if you’re worried about money woes for your small business, keep reading for tips on improving your financial stability today.
1. Ignoring Financial Reports
The first thing you have to understand as a small business entrepreneur is the importance of keeping tabs on your financial reports. That said, financial reporting refers to the process of keeping periodic records of financial/cash flow statements. Cash flow statements are a type of financial statement that detail the cash inflows and outflows of a business. With that in mind, financial reporting is important because potential financiers and other interested parties will often request them to evaluate your business. Additionally, not keeping tabs on the health of your business’s finances might lead to misunderstandings about how things are going. This can, in turn, result in poor decision-making. You need a cash flow budget to anticipate your profits and plan accordingly to prevent financial bottlenecks. Only with clean, regularly reconciled financials can accurate forecasts be made.
2. Not Focusing on the Issue of Overdue Payments
One of the most common cash flow mistakes small business entrepreneurs make is not paying off overdue debt first. As a result, these small businesses have a lot of difficulties with maintaining a steady cash flow. It will take a significant amount of time and energy to track down clients that owe you money. If you do not have enough cash on hand to pay all of your bills on time, you are putting your business in jeopardy of failing. If you are starting a new business, temporarily borrowing money may be necessary to keep from falling behind on payments to suppliers and employees. However, getting down to business is difficult if you don’t have enough cash on hand. Late payments are unavoidable; however, they can be dealt with if handled properly. We suggest the following:
- Make sure your customers understand the potential late payment fees you may impose.
- As most small businesses do not have late payment fees, setting up payment reminders is a viable option for ensuring prompt payment.
- If a borrower has been unable to make payments for an extended period of time, new repayment arrangements should be discussed.
- You might think about rewarding clients who pay in advance. There are two ways to do this: either give a free service or provide a discount on any outstanding charges.
3. Not Implementing Some Form of Automation
One of the top cash flow mistakes small businesses make is not streamlining processes with automation. By manually performing tasks that can be automated, businesses can incur unnecessary costs and waste valuable time. For instance, marketing automation can save you money and contribute to business growth by automating tasks such as lead nurturing, email campaigns, and social media management. By automating these tasks, businesses can reduce the need for manual labour and cut down on expenses. Especially those that come with hiring additional staff or outsourcing to agencies. Moreover, marketing automation can contribute to business growth by providing valuable insights into customer behaviour and preferences, allowing businesses to tailor their marketing efforts and increase conversion rates.
4. Overspending or Under Budgeting
Oftentimes, small businesses struggle with cash flow due to either overspending or under budgeting. This is why having an effective budget plan is essential in preventing cash flow issues. Having a tight budget will ensure that a business’s spending and income are balanced. With that in mind, you can avoid overspending and under budgeting if you devote enough time and effort to developing and sticking to a detailed budget plan. By doing so, you will be able to prioritize your expenses. Additionally, you will also have enough money for all your other needs as well. However, you need to keep an eye on your budget carefully. This is the only way to ensure that you are on track with your spending and that it aligns with the established goals for your business.
5. Overestimating Future Sales
Making realistic estimates of future sales is critical to avoiding cash flow problems. This is because if you can’t accurately forecast, you won’t be able to predict future income or plan ahead. Overestimating sales can lead to or amplify these difficulties. This is because relying on inaccurate predictions may cause companies to overspend, neglect accounts receivable, and underestimate the need for capital. To prevent this from happening, it’s essential to create sound cash flow plans by forecasting sales conservatively and monitoring actual sales relative to forecasts over time. Additionally, you have to closely monitor your social media metrics as well as your general marketing metrics - this will make it easier to adjust plans promptly when necessary.
As you can see, there are quite a few cash flow mistakes small business entrepreneurs make. They are common and can lead to serious issues. That said, to avoid these mistakes, you need to know about common pitfalls, like overestimating future sales, spending too much or too little, and not doing a cash flow analysis. By creating a cash flow plan, managing accounts receivable, developing realistic sales forecasts and monitoring actual sales results against forecasts, creating an effective budget and monitoring spending to ensure it aligns with the budget, and regularly analyzing cash flow for potential problems ahead of time – entrepreneurs can avoid these common cash flow mistakes and keep their small businesses up and running. Being proactive in your approach to cash flow is essential for keeping any business healthy and successful.
Nick Djurovic, CEO of Digital Dot New York, is passionate about SEO and digital marketing. Nick loves contributing as a guest author on business blogs and sharing his skills regarding business ownership and creating a successful corporate culture. When he isn’t researching the inner workings of social networks and search engines, Nick can be found enjoying lazy weekend afternoons with his two dogs.