Starting your own business, small or large, is a tempting prospect – especially nowadays, where ecommerce, online shopping, and digital communications have made the world a lot smaller than it used to be. In fact, you could argue that right now is probably the best time in history to start a small business. According to stats, around 543,000 new businesses are started every month, which is a massive number, even on a global scale. However, while assuming full control of your career, hours, and income is definitely a plus of running your own business, there are also some downsides.
According to research, as much as 82% of businesses that went belly up have cited cash flow problems as the reason for their failure.
The most troubling part about this stat is that some of these businesses were, in fact, profitable. Their mistake lies in failing to take into account that cash flow doesn’t just depend on the amount of money going in and out of the company, but also stuff like their invoicing system.
To avoid these kinds of issues, let’s take a look at the six most common cash flow mistakes that could break your business, as well as what you can do to remedy the situation.
1. Paying Your Debts before Collecting on Invoices
Let’s get one thing straight first. We’re not saying that one is more important than the other, or that you should avoid paying your debts on time. But, you should avoid finding yourself in a cycle where your debts are due before you have collected invoices from your clients. Even if your company is doing pretty well financially, that sort of thing can easily create a cash flow problem.
Here’s what you can do to fix this:
- First of all, collect your receivables immediately, if possible.
- Second, you can stimulate your customers to pay you quicker by offering discounts on quick payments, or penalize those who are behind on their payments.
- Third, if you are in a position where you have enough clients, you can simply stop working with clients who are responsible for this cash flow problem.
- Ultimately, if you can’t make any of this work, you can look into different business finance types, such as loans or peer to peer lending.
2. Not Taking Seasonality into Account
Some businesses, especially those in the retail industry, make the majority of their profits during the holiday seasons. This means that, while you will be hitting it out of the park during Christmas time, you will get by or even struggle for the remainder of the year. But, even if your business’ profit is relatively stable, you can also encounter seasonal fluctuations you haven’t foreseen.
The solution would be to take all those seasonal fluctuations and include them into your cash flow forecast, so that you have enough money to operate for the rest of the year.
But, you can also be more radical in your actions and diversify your business, which will help you maintain a more consistent cash flow. For example, if you are selling Christmas trees and decorations, you’ll want to think about expanding your offer to include other holidays, as well as to sell decorations and household items that can be used all year round.
3. Not Being Profitable
Lack of profits is one of the main reasons why businesses fail, but even if your business is profitable, that doesn’t mean it’s completely sheltered from cash flow issues. How so?
Well, you are only truly profitable if there is still some revenue left in your bank account after you have paid off your debts, as well as invested in your business according to your business plan. If you are constantly using your profits to cover your expenses or investing them back into your company, then you’re not profitable in the true sense of the word.
One of the ways to increase your profit without having to make additional investments is to use your existing resources in order to:
- offer additional products
- offer consulting services
- look for new business opportunities
- expand your skillset and scope of your business
4. Spending on Non-Essential Stuff
One of the most common mistakes businesses make is to invest in non-essentials as soon as they have some cash lying around.
For instance, while having a brand new office space or top-of-the-line equipment is always a good thing, think about whether those investments are really necessary at this point or not. Sure, if you have hired a bunch of new people, you will need a bigger office – but if your business is operating well at the moment, then it’s probably best to hold off on buying fancy investments.
The best thing you can do here is to come up with a forecasting model that takes into account all the necessary expenses that are coming your way, which may or may not be new office space, equipment, or staff. If they can help you turn a larger profit – which is often the case with highly skilled staff – then go ahead and do it. But renting a nicer office just because it would be cool is an unnecessary expense, at least until you have more cash to burn.
5. Not Expecting the Unexpected
Regardless of how well your business is operating at the moment, you never know when you’re going to run into some unexpected costs. They can be the result of large-scale issues, such as the global economic crisis or an unstable political situation in your region. Just the same, you may be faced with unexpected costs due to small-scale problems, such as your equipment malfunctioning, one of your most valuable employees leaving, encountering poor customer reviews, or a pipe bursting at your office. All of this can diminish your profits or slow down production.
While you can’t really plan for some of this stuff, you can create a plan for the next six or twelve months, and start setting aside cash in case you ever need to tackle one of the issues mentioned above. Also, in case there is a natural disaster or a flood in your office, you should also think about having insurance beforehand. It’s an additional cost, yes, but it can cover some of the unforeseen expenses should they arise.
6. Poor Funds Management
Managing company funds is something that should not be taken lightly, for at least a couple of reasons.
First, as an entrepreneur, you may not possess sufficient knowledge of finance in order to make the most out of your funds.
Second, managing your business’ finances represents yet another thing that you need to juggle, and being an entrepreneur, as we know, involves keeping an eye on just about every aspect of your business.
Now, you can use accounting software to make cash management more streamlined, but it would be really good if you could hire an accountant to take care of finances for you. If this is not an option due to a lack of resources, you can either use software or delegate this to a trusted employee who doesn’t have their plate full.
Final Word
As you can see, maintaining a healthy cash flow is imperative for the success and smooth operation of your business. But, keep in mind that cash flow can be affected by lots of different factors, not just your profit. We hope that the tips shared in this article will help you steer clear of the common cash flow mistakes and guide your business in the right direction. Good luck!
