Cash is crucial for business survival. However, managing cash is one of the greatest challenges among most small business owners and entrepreneurs. In most cases, small business owners make cash flow mistakes that derail their business performance and growth.
Cash flow is a significant indicator of the financial health of your business. If you make any mistakes in your cash flow management, you risk falling into critical financial pitfalls. So, what are these cash flow issues that are costing your business money? Read on to learn more.
1. Failing to Track Invoices and Payments
Failing to track invoices and payments is one of the vital cash flow mistakes you should avoid. Unpaid invoices will not help you pay your employees, cover your tax bills, or grow your business. Furthermore, your business will suffer a significant cash flow shortage if you have many unpaid invoices.
Therefore, make sure that your customers do not take advantage of you. Prevention is the best medicine when it comes to cash flow. Ensure your business has a robust process where all clients pay on time and understand your business’s payment terms. The payment terms you have in place should meet your cash flow management needs. For enhanced financial control and efficiency, consider implementing ROI tracking software.
2. Overestimating Revenue
One of the common mistakes that small business owners make is confusing money in the bank as revenue. Cash flow and revenue are two different things. Revenue is the money that your business will have after subtracting its expenses. On the other hand, cash flow is the total cash moving in and out of your business at any given time.
It is possible for your business to have a positive cash flow but fail to make a profit, often seen in scaling businesses or startups. In such a case, if you confuse your cash flow for revenue, you may end up making bad financial decisions, such as using the overestimated revenue to cover loan repayments or asset purchases.
Overestimating your revenue can lead to a cash crunch. Therefore, it would help if your business used tools like those found at https://cashflowfrog.com/ to avoid cash flow mismanagement.
3. Ignoring Accounts Receivable Aging
Accounts receivable aging determines a business customer’s financial reliability and health. It involves a periodic report that classifies your business’s accounts receivable by the length of time unpaid invoices remain outstanding. Ignoring accounts receivable aging is a common mistake that many small business owners make when managing cash flow. It can ensure that you overestimate your income.
Also, if you fail to keep track of your accounts receivable aging, you may forget to ask customers to settle their bills or not know whether you have been paid. Furthermore, ignoring accounts receivable aging means you sold services and products for free, which negatively impacts your cash flow.
The longer you ignore accounts receivable aging, the fewer clients’ chances to make payments. One of the best ways to reduce accounts receivable aging is by setting an effective plan. Some of the things you may include in this plan are:
- Determine the creditworthiness of your customers before providing them with services and products on credit.
- Establish a clear upfront payment expectation.
- Get your clients on autopay.
- Set payment reminders.
- Renegotiate the payment terms if the account receivable aging is for a long period.
- Reward clients that make early payments.
4. Overborrowing and Underpaying Debt
Overborrowing and underpaying debt are financial mistakes that can lead to severe pitfalls. This overborrowing puts a financial constraint on your business as you will dedicate most of your cash flow to paying off the debt burden, which takes up a significant portion of your business’s revenue.
It can also lead to overleveraging. Overleveraging involves your business having too much debt than its operating equity and cash flow. An overleveraged business often has trouble paying its loans. It means that the business ends up underpaying its debt.
In most cases, an overleveraged company cannot pay its operational expenses due to the debt burden, leading to a downward financial spiral. Having to borrow too much for your business to stay in operation can cause the problem to become worse. It can even lead to bankruptcy. Therefore, make sure you control your business borrowing.
5. Neglecting Cash Flow Projections
Many entrepreneurs know that cash is vital. However, they fail to see that cash flow projection is crucial for managing business finances. Being able to anticipate changes in cash flow can work wonders in your financial management journey.
The best starting point for cash flow projection is your current and past expenses and income. Use the current and past cash flow to make predictions of the future cash flow. Make sure that you anticipate shortages before they occur.
Discovering that you lack enough funds to cover your bills is not something you should anticipate. Thus, make sure you use cash flow forecasting tools.
Financial mistakes are deadly to cash flow management. They can end up costing your business a significant amount of money which may lead to ineffective operations and hinder business growth. Do you practice effective cash flow management? What tool does your business use?