7 Worst Cash-Flow Mistakes Small Business Owners Make
Running a small business is no small chore. On the contrary, it requires many careful considerations including matters of staff, business plan, suppliers, and investors. However, one of the most important things an entrepreneur needs to worry about is cash flow. While cash flow can keep your business running smoothly, it can also be the reason for your downfall. According to recent statistics, 60% of failed small businesses named cash flow as the cause of their failure.
If you do not want to end up among the unlucky 60 percent, here are some of the worst cash-flow mistake you should not repeat.
Being overly optimistic about future gains
If you have decided to run your own business, you must have a trace of optimism inside. While that is a good thing, because it helps you overcome numerous obstacle along the way, it is never useful to be unrealistic when it comes to revenue forecasting. It is crucial to estimate future sales volumes based on real numbers and historical evidence. If you are in your first year of business it is impossible for you to use past revenue data for predictions, but you can compare with another business in your industry of a similar scale. This will save you from overspending based on wishes that may never come true.
Spending money to make money
This is often a mantra in the business world, but as a startup, you need to think otherwise or at least give this sentence a careful consideration before you take it too literally. Of course, you do need to invest in equipment, staff, and other essential things in your early days in order to produce and create profit, but not all expenses are created equal, and some can wait until your cash flow is stable. Every expense should be assessed based on its cost-efficiency, and a realistic budget should be established accordingly.
Not collecting the payments regularly
This is a mistake small B2B business are particularly prone to, but it is not strange for regular small businesses to fall into this trap as well. Unpaid invoices from clients are cash-flow killers. If a business is not proactive in collecting payments the clients could take advantage of it. Besides having a collection schedule in place, if you are serious, if you also need solid late-payment policies. Your clients should know and be alerted when the collection is due. Good penalty policies include five percent fine for being five days late and work stoppage after thirty days.
Not tracking the day-to-day cash flow
Depending on the nature of your business, you will give and receive cash on a regular basis. Sometimes, you will need to spend more, and sometimes you will earn more. If the vendor payments come due before you make your sales, it can become difficult paying your bills and staff on time. That’s why it is essential to plan ahead and never rely on future sales to pay your debts. Also, there will be a time when a cash-flow statement will come in handy for tracking the inflow of revenue and outflow of costs.
Not keeping money just in case
Troubles in cash flow are a business reality. They can come in the form of cash hiccups or an instant disaster. The latter one is possible when your company is operating from a zero account balance, and it can cause one bad month to ruin your entire budget. To protect your business from cash-flow problems, you should keep your account balance equal or approximate to a minimum of two months of operating costs. This can vary from one business to another, but every entrepreneur should have some sort of cash reserve. If you’re struggling to keep enough cash around one option to consider would be something like an SBA loan. Some SBA loans under $25,000 may not require collateral to back the loan, which can be an attractive option for small business owners.
Biting more than you can chew
Growth sounds like the best thing that can happen to a business, but this is not always the case, especially if you are not ready for the expansion. Many startups invest a lot of money into Facebook and Google ads, and sometimes that results in forced and rapid growth. As a consequence, you have more sale and demand. This means you need more supplies, a bigger office, and more employees. Can your cash reserve handle this kind of unforeseen growth? We wouldn’t take that risk.
Overspending on the acquisition of customers
The acquisition cost is the amount spend on gaining a new customer. While we are not denying the importance of appealing to a new audience and gaining more profit, there is something that is far more important for getting a new customer, and that is retaining the old one. Contrary to the acquisition cost, there is a little something called the lifetime value of a customer. This is the total revenue one customer produces over its lifespan. This value must be bigger than the cost of acquisition of that customer. Overspending on attracting a new customer doesn’t pay off if you can’t keep them faithful to your business.
Keeping the cash flow stable is one of the biggest challenges a business owner encounters, particularly because it is an ongoing one. However, if you manage to keep track of your spending and revenue while being objective about your future profit, you just might be able to avoid the pitfalls you’ve predecessors have fallen into.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.