Four Costly Cash Flow Errors You Can’t Overlook
There is perhaps no greater marker of health for a business than the existence of a robust cash flow. Despite this, cash flow problems are all too common and have been shown to be the reason behind 82% of business failures.
Here are four of the most common cash flow errors, and how you can avoid them.
Whether you are looking at fixed costs, such as rented office space, or variable costs, like inventory, it’s important to regularly review your expense sheet and trim unnecessary expenditures. These unchecked costs vary depending on the nature of your business and which expenses are required for growth. For example, having a prime location is a top priority for a coffee shop whose sales are largely shaped by local demand. Because of this, location-based businesses may choose to carry higher rental expenses in order to achieve targeted profits. However, a wholesale business can save on prime rental costs by choosing a cheaper location to set up shop as sales are unaffected by this cost-saving strategy.
To avoid this cash flow error, you need to get creative and attentive. Check in on your expenses regularly by fostering a detailed knowledge of amounts and dates of upcoming cash outlays. Record when each penny will be spent and on what. Do not clump expenses together, but instead create separate line items for every significant cost. These may include rent, inventory, salaries and wages, sales and other taxes withheld or payable, debt payments, as well as anything that may be particular to your own business.
Delayed Accounts Receivables
Though money in accounts receivable can be a sign of payments to come, it may also mean trouble on the horizon. Because accounts receivable still need to be collected, by treating these figures as profit, you can end up short when expenses arise. This cash flow problem is most prevalent when businesses fall into the pattern of being passive, rather than proactive, about collecting past-due payments. Clear guidelines can be helpful in counteracting this passivity. Create a series of steps that keep both you and your clients accountable to following through on payments. You may want to determine and clarify consequences for when payments are late, such as a late-payment fee or work stoppage.
Get proactive with your accounts receivable by setting up a clear workflow that includes prompt invoice issuing, tracking of slow-paying customers, or even a cash-on-delivery agreement. Consider implementing credit checks on all new noncash customers. If waiting on payment is unavoidable, have customers make a deposit payment at the point of the initial order, which will increase the likelihood of your company being compensated.
It is well known that most businesses are overly optimistic about sales numbers and growth rates. However, similar and equally problematic patterns occur when it comes to cash flow. This happens when business owners assume that receivables will continue to come in at a constant rate, that principle and loan interest rates will not fluctuate, or that payables can be extended as far as they have in the past. Though inaccurate guesses in one of these areas may not cripple a business, if the inaccuracies are compounded, the company may end up in a serious cash bind.
On its own, a cash bind is not a fatal flaw for a new business. These moments are to be expected. The way to work against this error is to actually plan for it. It’s impossible to accurately predict the future, so the only safe way to set your business up for success is to be prepared for the worst — even while hoping and working for the best.
There are several common business practices that can help you get back in the black when you experience a shortfall. Banks are much happier to offer a loan before you are in need of one, so make sure to apply for working capital before you are desperate for it. Alternatively, consider turning to your suppliers, as they have a vested interest in your success and may be willing to arrange an extended term. This may at times be equal in value to a significant low-cost loan.
Forgetting That Growth is Expensive
One of the most financially precarious times for a business is during periods of significant growth. For retailers, this may come as the result of doing major purchasing in preparation for busy seasons such as holiday shopping. For other companies, it can be during a growth spurt where sales may double, causing production costs to do so as well. Prepare for this by planning ahead and ensuring you have adequate working capital. If you see the potential for significant growth in the near future, do all you can to secure appropriate financing ahead of time to get you through a cash crunch.
Another way growth can cost you is in operational mismanagement. Prepare by optimizing your customer service for scalability to avoid an increase in returns or loss of faithful customers.
A good tip is to keep your spending as close to pre-growth habits as possible. Some businesses find themselves going on a success spending spree, taking an increase in orders as a sign to increase spending. A growing company will require some additional expenditures, including extra help or important infrastructural supports, but these are often smaller than business owners assume. If you’ve built your company lean, continue to operate on minimal expenditures as you grow. Not only will this keep investors happy, but it will also guarantee you a healthy financial cushion when you really need it.
Looking at your cash flow regularly can not only help you save but also grow your business. Get in the habit of a regular check-in, whether weekly, monthly or quarterly. This will help you be clear on the health of your business and keep you calm, allowing you to make the most strategic choices possible.