Common Cash Flow Mistakes Most Small Business Owners Make
Every business no matter how good the product may be, or how much funding they have are bound to face trouble if their cash flow management is off. A company’s cash flow is dependent on timely invoice payments from their customers. A 2016 survey by Atradius on B2B Payments in APAC showed that Indian businesses face a delay of 65 days on an average to receive payments from the day of invoicing. The business struggles to stay afloat when these payments are delayed. This is one crucial aspect of any business that can spell success or doom for them. Here we outline some of the most common cash flow mistakes small business owners should stay clear of to avoid jeopardising their survival.
Cash flow mistakes to avoid
Being over-optimistic about future sales volumes
It’s important to remain objective when you make your financial projections and projected cash flow for your business. Account for dips in the market, a boom in sales around the festival season, financial year closing, etc. Base your projections on hard facts and past revenue data to track trends and predict future sales realistically. If yours is a new business, having no past data to work on can make it hard to predict your sales. In such cases, an experienced mentor from the same industry who can provide his/her insights will be a valuable asset in preparing your projections.
Overspending during the first phase
Quite a few businesses are guilty of this during the “startup” stage. They tend to splurge on things that don’t add to the company’s bottom line in the long run. Expenses like heavy fees to advisors and consultants who again might use your capital for things that aren’t really necessary or that foosball table you bought your employees might be expenses you could do without at the moment. Focus on beneficial expenses that’ll help increase your business profits. Though they say that “It takes money to make money”, remember that every penny spent is penny taken away from your profit margin.
While it is important to curb your expenses and maintain a check on them, it’s also crucial to create a cash-flow budget and stick to it. Your cash flow statement is a good starting place to create a budget that’ll give you an idea of the incoming and outgoing funds.
Not following up on past-due receivables
Delayed payment from clients is the primary cause for a majority of cash flow issues that businesses, small businesses, in particular face. Don’t sleep on following up on payments that are way past their due dates. It’s important to be proactive about it. You could even consider implementing late-payment penalties or collections policies in place because it is often businesses without these that are taken advantage of. Certain service-sector companies have 5 percent late penalty after five days in place and stop all work if payment is 30 days past due. Create a timeline for each step of the payment process, right from the day of service or product delivery to invoice generation date and day of payment. You could consider giving an incentive to your clients for early payments in the form of discounts.
KredX, India’s leading invoice discounting marketplace, follows a similar approach where they help small businesses gain access to funds thereby, ensuring a healthy cash flow. Businesses upload invoices raised against corporates on the KredX platform after which interested investors buy them at a discounted rate. These businesses thus receive early payments to fund their working capital requirements by using invoices as pseudo-collaterals. In reality, companies forego a very small percentage of their profit to make sure their cash flow isn’t affected.
Not keeping a cash reserve
Working from a zero-balance account could be disastrous for your company during lean periods. It’s always wise to maintain an account balance of two-three months of operating expenses. This will help your business tide over any unfavourable periods without many problems and protect yourself.
Solving a business’s cash flow issues is half the battle won. By knowing the exact cash flow mistakes you need to stay clear of, you can ensure a worry-free, successful growth for your small business. Good luck!