There are many factors that play a role in the success of your business. You may have an amazing product that everyone loves, a great business model, and tons of profit coming in. However, if your business is plagued by poor cash management, you’re all but doomed to fail.
This is especially true for startups and small businesses, which are at an extremely high risk of facing financial issues. In fact, one study found that more than 80% of small businesses fail because of poor cash flow management.
After the economic crisis that businesses around the world have faced due to the pandemic, it’s more important than ever to know how to best manage your business’ money.
Here are 7 of the most common mistakes to avoid making so that your business can not only survive, but thrive.
1. Poor monitoring and management
Cash management isn’t something businesses owners should do as time allows. Keeping track of the money that’s coming in and going out is an important part of maintaining your business’ financial health.
Throughout the days and week, you should expect your business’ cash flow to ebb and flow. Make sure that you’re aware of when expenses are due and when customers should be paying.
Remember, just because your business account shows a positive balance doesn't necessarily mean that you have readily available cash.
2. Not preparing for the worst-case scenario
All businesses face bad days. From late payments to unexpected expenses to insufficient cash to pay for monthly expenses, rainy days are inevitable. Excess expenses combined with little to no cash reserves is a recipe for disaster.
Businesses should save as much money as possible to build up a healthy cash reserve. Most financial experts recommend saving 3-6 months of your company's regular expenses.
To build your cash reserve:
• Reduce non-essential expenses
• Set a monthly savings goal
• Maintain a separate account for savings
Having money on hand when things don't go as planned is crucial for keeping your business afloat.
3. Equating cash flow as profit
Though often confused, cash flow and profit aren’t the same. Cash flow is the net amount of cash moving in and out of your business at any given time. Profit is the leftover money after subtracting operating expenses from revenue.
This means that it's entirely possible for a business to be profitable with a negative cash flow. However, this type of scenario presents all sorts of hurdles.
At the same time, businesses can also have positive cash flow but little to no profit. This is especially true for new businesses.
4. Impulse spending
We all know it takes money to make money, but this saying doesn't enable gross overspending. It's important to remember that not all startup expenses are equal. Instead of mindlessly spending, invest in things that will benefit your company's profitability now and in the future.
To avoid impulse buying and overspending:
• Create a realistic budget
• Identify needs vs. wants
• Make every dollar count
While it may be nice to renovate your office or to treat employees to a new foosball table, chances are these expenses don’t provide a great return on investment. Be smart when spending!
5. Payment errors
Errors happen, especially if you’re managing your finances manually. But when it comes to dealing with your business' cash flow, even the smallest error can have a rippling effect.
Paying the same bill twice or paying the wrong amount to the wrong supplier can leave you with little to no funds.
Ensure your financial records are thorough and up to date. This way you can spot any errors and swiftly correct them.
6. Neglecting accounts receivable
Don’t lose sight of your accounts receivable. Late payments negatively impact your businesses cash flow. If customers don’t pay on time, it’s extremely hard to turn your profit into cash.
Don’t let late payments be the reason your business has little to no funds. Send overdue sales invoices as soon as payments are late. Let customers know ahead of time of penalties that they’ll face for late payments.
To minimize the number of late payments, reward those who pay on time and set up payment reminders for all customers.
7. Overestimating future sales
As a business owner, optimism is important. You know that your product or service is great, but having your head too high up in the financial clouds can be problematic.
Not everyone who comes across your brand will make a sale. And while sales may jump at certain points during the year (ie. holidays), you should always set realistic expectations.
Don't let optimism lead to cash flow problems. Though revenue forecasting isn't easy, make them with sound judgement and facts, not wishful thinking.
Use Dryrun
Managing your business’ cash flow isn’t easy, especially when you’re stuck doing everything manually. Say goodbye to fussy spreadsheets and hello to Dryrun.
This app is designed to help business owners understand their cash position. With the ability to monitor your current cash state, you can proactively address problems. Dryrun also offers a modelling feature that allows you to test “what if” scenarios so that you can make informed decisions.
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Forecast Your Cash Flow, Revenue and Profit in the Ultimate Scenario-Modelling Tool to gain confidence, clarity and insight into your business.
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