Learning to manage cash flow is part science, part art form, and when done effectively can power you towards your goals while enhancing your business growth.
On the flip side of the coin, failing to manage cash flow efficiently can see your business pay the ultimate price – a study done by the financial services company U.S. Bank, showed 82% of business failures were due to poor cash management.
To help you prevent putting your business at unnecessary risk we’ve put together five cash flow errors to avoid when managing your company's cash. While these errors are part of business development, be aware of them is going to empower you to take your business to the next level.
Not invoicing quickly enough
It’s easy to make finding and completing ‘work’ a greater priority than invoicing and receiving payment. Yet, this can have a disastrous effect on cash flow, particularly if you find yourself regularly questioning who has and hasn’t paid you. The simple truth is that if customers receive a bill or invoice late, they’re far more likely to overlook or delay their payment.
Consider laying down a rule to always bill as soon as a project is complete. Or better still, consider billing a 50% payment upfront.
Growing too fast - too much too soon
While it’s natural to want to grow your business, care must be taken to have a growth strategy that doesn’t suck up cash you don’t have.
It may sound like a strange paradox but growth can be a bit of a Trojan horse - problems can disguise themselves within opportunities.
Developing your business should always be an aspiration but be sure you have the means to do it effectively and without putting your business into serious jeopardy, through detailed planning and making sure you’ve secured the necessary finances for growth.
Not budgeting for cash flow
The cash flow budget document must be a key foundation for your business, to maintain a clear picture of your expected revenue and expenses. Make use of a cash flow budget to keep track of day-to-day transactions and identify patterns around how your revenue and expenses are moving.
Have you had a read of our eBook, “10 tips for busy business owners” yet? This practical guide is aimed directly at small business owners and has some great advice in chapters 3, 4 and 5 around cash flow budgeting.
Not forecasting revenue
If you want to have a comfortable level of funds to play with, it pays to regularly create and update your cash flow forecasts.
Estimate your expected revenue and take down the amount and date of all upcoming cash outgoings.
To make things clearer use a separate line for each significant cost in your cash flow forecast. Try not to be too optimistic (it pays to be on the conservative side when forecasting) and use historical numbers to help your guesstimates.
And, if your business is affected by seasonality, make sure to build those fluctuations into your calculations too.
Not thoroughly analysing expenditure
Regularly reviewing your expenses will help you to see the potential return on each spend while helping you to refine any unnecessary spending.
This should include rent, salaries, wages, taxes and debt payments. A great way to see how you’re spending in comparison to other business is to get onboard with business benchmarking technology, which allows you to compare your business against competitors and companies of comparable size in your industry, to show how your spending looks on a broader scale.
Coming to grips with cash flow management is a massive step in moving your business to a place you feel comfortable with.
If you stay aware of these 5 crucial and typical cash flow errors then you’ll give your business a much better shot at efficiency, and success.
As with most things we recommend at RightWay, keeping a vigilant eye on cash flow is about being able to get better enjoyment out of your work and life without the constant concern of wondering whether your cash – the lifeblood of your business – is in a healthy state.