Managing cash flow is an essential part of any business. A lack of cash flow can undermine even the most productive or efficient company. To avoid jeopardizing your company's future, getting your cash flow in order should be a priority from day one. To learn best practices, it is often wise to learn what not to do when it comes to managing cash flow. Here are the worst cash flow mistakes a business owner can make, according to an article in Entrepreneur magazine:
Overly Ambitious Revenue Goals
It's great that your company has big plans for its future! However, it's important to stay optimistic while balancing realistic revenue expectations. Use real numbers and historical evidence from your company to forecast future revenue, track trends, and predict future sales. For new companies without historical data, it would be wise to take a look at industry trends for a more accurate idea of what's likely in store for your company. Using objective figures to set revenue goals will in turn make predicting cash flow easier.
Overspending During Startup Phase
The old adage “you have to spend money to make money” does not always apply. Yes, new businesses require an initial investment. Spending money without a clear purpose as to why, or a plan to back up how that product or service is to be used in the future is wasteful. Having a clear cut plan for a large expenditure ensures that the spending is not wasted, and that you will end up with a return on your investment. Do not spend money for the sake of spending money.
One of the biggest cash flow problems occurs because a company is owed money and hasn't collected it yet. Outstanding invoices and past-due payments can snag your cash flow plans because even though you've earned the money, you don't have the cash on hand to use it for another purpose. Before you run into a problem with past-due invoices, set up an internal procedure regarding the timing of payment reminders. Have a policy in place on what the penalties are. If your clients know you're on top of your invoices, you will most likely be the first of their vendors to get paid.
Not Tracking Cash Flow
Keeping a cash flow statement is essential. You need to know how much money is coming in and how much money is going out of the business at any given time period. A cash flow statement can predict a shortage before it's too late and allows you to do proactive planning about the future cash flow of the company.
Not Keeping Cash on Hand
Having a cash cushion for emergencies is essential. Similar to saving for unexpected expenses or emergencies in your personal finances, it is wise to keep two months of operating expenses on hand at all times to safeguard against the unexpected. Whether your business is hit by a slow sales month, or a hurricane in your region halts operations, you will have a greater peace of mind knowing that your business can weather (so to speak) whatever is ahead.