Small business tips: avoid cash flow management mistakes
Starting up your own company is an extremely rewarding venture to take on, but it’s also daunting and stressful. And there is a lot of thought and a lot of planning that needs to go into the process.
Even a small business is going to be something that you have to approach from a variety of different angles. You need to cover all of your bases, from your product to the money to your customers and each of these things are important in their own right.
One thing that you absolutely must take control of at a very early stage in your company’s development, is cash flow. If you haven’t heard this term before it’s pretty self-explanatory. Cash flow simply refers to how much money is moving in and out of your company.
If you don’t keep an eye on this and make sure that your business is always making a profit, then you could put the company in serious danger. Many small businesses have gone under because they failed to track expenses successfully and manage their cash flow.
Here’s a few of the more common cash flow management mistakes and you can make sure that you avoid them.
Overestimating sales
You wouldn’t start a business unless you were reasonably optimistic that it was going to be successful. Unless you’re banking on some kind of divine intervention pushing your company forward, you’re probably pretty confident your product or service.
And this is good, it’s always good to have a positive outlook to keep yourself motivated when things are a little rough or a little slow, but what you need to accept is that you are never guaranteed success.
And it’s probably not such a good idea to plan for success. You should really be preparing for the worst possible outcome, and this means not overestimating how much you are going to sell in the future.
Obviously you shouldn’t be so frugal with your expenses and employees wages that you’re not spending anything to get the business off the ground, but try to predict your sales with as much accuracy as possible.
The best way to do this is to analyze the market that you’re in and find historical evidence of how much the type of product you offer actually sells. Every company will see a different level of success of course, but you can get a strong indication of your projected sales this way.
Again, don’t lose any optimism that you have about how far you can take this particular business, but just make sure that you temper it with a healthy dose of reality.
Avoiding an emergency fund
An emergency fund is absolutely essential for any business, especially a small one. Just like you could have an emergency at home be it house-related or medical related or whatever, things can go wrong for your company too.
Expensive things can go wrong, and they can happen so unexpectedly too. It could be something like accidental damage to your products, or the inability to deliver on an agreed upon service due to missed transport, or maybe even something that seems positive on the surface.
You might get a promising new client but have to purchase a massive amount of stock to satisfy their needs. Put something aside for an eventuality such as this one, and you don’t even have to think of it as an emergency fund.
It’s just a cash reserve more than anything else. Put a portion of your company’s income into it every single month, it doesn’t even need to be a huge amount because emergencies will more than likely be infrequent and so you’ll have a strong reserve before you know it.
Not chasing your receivables
This is a mistake that a lot of people make when they’re starting out and it tends to happen because no one wants to make any enemies. Which is important of course, but also, you need to keep on top of what you owed.
In simple terms, receivables are just what is owed to a company. You could have some from clients, customers, investors, anyone who could potentially owe you money could also potentially find an excuse not to pay it.
Or at least not to pay it on time. Small businesses, new businesses, people love to take advantage of them. Not everybody of course, but there is going to be those who do and you need to make sure that you don’t let these receivables slide.
There are ways to chase them down effectively, but it is important to make sure that you don’t end up with enemies along the way too. Try to build strong relationships with your customers that are based on trust.
And always make the payment terms as clear as possible. Sometimes you’re not actually being taken advantage of, you just haven’t given the customer sufficient information.
Overstocking inventory
Earlier I mentioned the possibility of you having to shell out on a bit chunk of inventory for a new client or something, and while that is something businesses often have to do, you shouldn’t overstock because you assume that’s going to happen to you.
The most common way that people make this particular mistake is by ordering their product in bulk, assuming that it’s going to save them money in the long run. But the trouble with that is that there’s a good chance it will just sit on the shelf for a long time.
Especially at the very beginning when you aren’t well known and haven’t really built up any kind of substantial relationships with customers and clients. You’ll essentially just be putting your money on the shelf where you can’t do anything with it.
This is completely pointless. Maybe you can do it in the future when you are confident that you are going to have a lot of sales going forward, but at the beginning it will destroy your cash flow. You won’t have money when you need it because it will be sitting on the shelf in the form of products that nobody is buying.
Avoid this one like the plague, it’s one of the worst mistakes that you can make as a small business or a new start up.
Borrowing money
You shouldn’t do this in life in general, but especially not when you are trying to run a small business. You do not want to put yourself in debt to anybody. Earlier I discussed chasing down customers who don’t pay what they owe when they owe it, well here’s the flip side.
Even if you have the best intentions, if you borrow money in the hopes that it will help you build up a company that is just getting started, then you are running a serious risk of not being able to pay it back.
If you are facing a cash-flow problem and you are in need of some extra, don’t borrow money unless you absolutely have to. It should be a last resort. It will almost certainly just make your cash flow problems worse so do everything in your power to avoid this one.
No one ever said that running a small business would be easy, and managing your cash flow can be a massive source of stress. But the mistakes discussed above, common as they are, are easily avoidable if you approach it the right way. Don’t allow yourself to fall into any of these traps.
