6 Cash Flow Mistakes that Can bring Your Business to Its Knees
Home to 2.2 million small business, Australia is not short on entrepreneurship.
Building a successful business is, however, not without its fair of challenges. Top among them are managing a business’ cash flow.
At the most fundamental level, a healthy cash flow speaks to a balance between the cash generated by a business and the cash it spends.
If not managed properly, you might find yourself with no funds to run the day to day operations of your business. This can lead to debt and at times, can bring operations to a standstill with serious repercussions to your profitability.
Which are some cash flow errors that can bring your business to its knees? Here are some common ones.
- Overspending Early On
This is a common problem with new businesses. Granted, a business is required to spend money to make money.
However, not having cash to spend on business emergencies can seriously affect your operations. Make sound evaluations for every coin you spend against what your business stands to gain.
Similarly, look at different benefits of the various services you need before committing to one. A Fuel Card Comparison tool, for example, can help you identify a provider with the most benefit for your business. Replicate this in other areas of your business to ensure you are getting value for money. Don't use plagiarised sources.Get your custom essay just from $11/page
- Not Having a Firm Handle on Your Cash
The best way to manage your cash flow is by understanding the ins and outs of your business’ cash needs.
This is important because it helps you make projections and assumptions on how much you expect to come in and what you should expect to spend.
This will help you create a cash flow budget and set aside business emergency funds.
- Failure to Save for a Rainy Day
Whilst it’s important to reinvest in your business, it’s equally important to save up for unforeseen events that require liquidity.
With substantial cash savings, you can manage late payments and take up new business opportunities with ease.
With a zero balance, on the other hand, events like late payments can halt operations.
The rule of thumb is to have at least two months of operating expenses set aside.
- Being Too Passive on Payments
Unpaid invoices spell doom to your cash flow.
If you are too lax about collecting payments, you might find yourself in a cash crunch.
Often, clients pay those invoices with the most presumed urgency. This is most often judged based on your communication. If they do not hear from you, they push your payment to a later date.
To avoid delays, ensure to have clearly outlined late payment penalties as well as work stoppage policies.
- Mismanagement of Taxes
All businesses are obliged to pay taxes. The more you commit violations and defaults, the higher the interest and penalty fees you end up paying.
These payments can severely affect your cash flow or deplete your business emergency fund.
If you feel underequipped to handle your business taxes accurately, get a tax expert on board when tax season comes around. Managing a yearly tax preparation fee as a budgeted cost is far less damaging than getting slapped with a tax lien.
- Ignoring Seasonal Changes
If your business is seasonal, you will experience cash-rich seasons and others where cash is scarce.
A common mistake made by businesses is making more overhead commitments that become difficult to maintain after the high season.
To protect your cash flow, ensure to account for this in your financial planning.
Final Word
The key to having a healthy cash flow lies in learning your business, planning for worst-case scenarios and identifying ways to run a lean business.
With these in place, your business gets to enjoy a healthy cash flow, and you can focus on scaling your business as opposed to putting out cash flow fires.