Are you making cash flow management mistakes in your small business? If so, you are putting your business at risk for failure.
10 Common Cash Flow Management Mistakes and How to Avoid Them
Cash flow refers to the money that moves in and out of your business. When your cash flow is positive, you have more money coming into your business than moving out.
However, when your cash flow is negative, you are not bringing in enough money to cover your expenses and make a profit in your business.
While you might think of a cash flow problem as not having enough money coming in, many businesses fail regardless of the money they bring into their business. When this happens, it’s usually because there is a cash flow management problem.
Cash flow management requires you to monitor, track, and control the money flowing through your business. You need to use your company finances wisely to encourage growth and to build a thriving business.
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Unfortunately, many business owners fail to manage their cash flow correctly, resulting in a variety of problems that can overwhelm your business. If want to have a good handle on your business finances, here are several mistakes to avoid.
1. Not Putting a Cash Flow Management Strategy in Place
One of the most common mistakes business owners make when managing cash flow is not having a management strategy in place. This includes failing to monitor your cash flow and not knowing, at any given time, what amount is in your accounts, the bills you need to pay, and more. To avoid this mistake, make sure to implement an effective cash flow management strategy.
2. Confusing Profit With Revenue
A common cash flow management problem is confusing revenue with profit. Revenue is your gross sales, the amount you generate by selling your products and services. Profit is the amount of revenue you have leftover after you have paid your expenses.
To avoid making this mistake, make sure you understand common business financial terms and you are not only focusing on your revenue or profit.
3. Not Checking Your Customer’s Creditworthiness
A common mistake many new and small business owners make is to extend credit to their customers without checking their financial stability. This can result in past due bills, late payments, and other issues that will affect your cash flow. To avoid this mistake, make sure you are running regular credit checks before extending credit to your customers.
4. Not Increasing Cash Flow
When you start a business, you likely think the money that comes into your business is due to the products and services you provide. However, there are all kinds of ways to increase your cash flow and make your business more profitable. To avoid making this mistake, you can learn how to increase your cash flow here.
5. Trying to Manage Your Cash Flow Manually
If you are new to the business, you are likely DIY’ing every task you can. While bootstrapping your business does have a few benefits, one area you should never bootstrap is your business finances.
One of the best ways to boost the profitability of your company is to avoid handling your finances without the help of an accountant or accounting software. To avoid making this mistake, consider using an affordable bookkeeping or accounting service.
6. Failing to Monitor Your Account Receivables
Do you have open customer invoices? If you are like the average business owner, you probably do.
This is a common mistake many people make, which can affect your overall cash flow. To avoid this mistake, make sure you are on top of your account receivables so you can encourage cash flow into your business.
7. Ignoring Sales Fluctuations
Sales naturally fluctuate, depending on a variety of factors. When sales are in a downturn, many business owners fail to react and make changes that will account for the decreased cash flow. To avoid this mistake make sure you have a plan for the ups and downs of the business and react quickly to any fluctuations you are experiencing.
8. Spending Based on Sales Projections
An essential component of any marketing plan is projecting the sales your campaign will bring in. While these sales projections should be based on data, you can never fully predict the future.
Unfortunately, many business owners make these projections and then spend money based on their projected revenue instead of their actual revenue. This is a mistake that can quickly cause cash flow problems and lead to serious consequences.
To avoid making this mistake, spend based on what you have, not what you are projecting will come in.
9. Not Having a Cash Reserve
Every business has its ups and downs, times with plenty of cash flow and times with you are struggling to stay afloat. This is a reality of owning a business, one every business owner needs to prepare for.
Unfortunately, many business owners do not prepare for the downtimes in their business and can be serious affected by a few months of low revenue. To avoid making this mistake, consider having a cash reserve you can use when business is slow.
10. Borrowing Too Much Money
For some entrepreneurs, using business loans is one of the main methods for financing their business. This is a mistake, one that can leave you over-leveraged and result in the failure of your business. To avoid this mistake, make sure you are only borrowing what you can repay.
These Are the Common Cash Flow Management Mistakes and How to Avoid Them
By avoiding these common cash flow management mistakes, you can give your business a real chance at success.
Start by putting an effective cash flow management plan into place. You should also understand the difference between revenue and profit, learn how to increase your cash flow, and use a comprehensive budgeting system.
Make sure you are not spending or borrowing too much or failing to create a long-term plan.
Follow these tips and you’ll be well on your way to creating a profitable business. Don’t forget to browse our site for advice on business, finance, advertising, and more.
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