No matter what model you choose to run your business, or how many potential investors are willing to invest in your startup, if you cannot manage the cash flow, surviving in the business world is impossible. The US bank (a financial services company), in one of its prominent studies, found that nearly 82% small businesses or startups fail in their initial phases due to lack of expertise in cash-flow management. So, if you want to be a smart and successful entrepreneur, it is vital to focus on managing the cash-flow of your company. Not only will it help your business survive in the mainstream business world, but also keep all the imminent dangers at bay. Let's quickly go through some of the common mistakes business owners make that cause cash-flow problems.
1. Lack of Attention to Business Expenses
As unexpected expenses disturb your household budget, they may do the same with businesses. Many unexpected expenses, including natural disasters, replacing technology, costly repairs of equipment or overspending may lead businesses to an unsustainable point. To put it simply, their cash flow crunches due to extra on-going expenses. To resolve this type of cash flow crisis, the management or the business leadership must take a vigorous look into ongoing business expenses; especially cost structure. It is essential for startups to pay attention to certain business expenses.
Many entrepreneurs only focus on the profits they are making but do not realize how much money has to be spent on a daily, weekly, and monthly basis. With that in mind, a rigorous process in business structure is critically important to help entrepreneurs track expenses, on not only a monthly but also project basis. You can hire a business accountant to manage and track the cash flow of your business. He/she can also help you anticipate future challenges to position your business in a better way.
2. Overestimating Your Sales Volumes
There is no denying that relentless optimism is one of the key traits of successful entrepreneurship. It is the best way to manage work stress and the troubles of startups from taking a toll on you. While optimism is necessary for any new entrepreneur, it should not cause you to overlook the objectivity of the business owners and their cash flow problems. The situation can be bad for the cash flow problem of many small businesses.
That is to say, if your sales volume increases in a short period, it does not mean that they get double by the end of the year. Expecting such things is a little unrealistic. This is where you need a realistic and objective sales forecasting that is based on real numbers. Using quantitative for casting method is a great way to track trends based on past revenue data of your business. You can predict future sales with objective intuitions to help your business make a realistic projection of sales.
3. Impulse Spending in Startup Phase
Many entrepreneurs believe that “money makes money.” The common belief can be true in many cases, but it may make business owners fall prey to overspending. And if it is the initial phase of the business, it can be potentially dangerous for cash flow management. It is because not all small business expenses are of the same nature.
There are many beneficial expenses that will translate into the profitability of your business in several measurable ways. However, there are many B2B services, advisors, and consultants who are ready to take the capital your startup makes. That is why keeping an eye on the cost-benefit ratio is extremely important for all expenses. For that, creating a realistic budget is always beneficial. Calculate the cost of every single project, unexpected expenses, and impulse spending (that may come up).
4. Being Passive about Unpaid Invoices
No doubt, this can be the fastest cash flow killer if you don’t pay attention to it. Many B2B startups suffer because of the unpaid invoices that lead them to the poor cash flow situation. Business owners, who are not pro-active when it comes to collecting payments or invoices on time, often face dangerous cash flow situations. Small businesses with no solid late-payment collection policies and late-payment penalties suffer a lot. Know that if your client knows that he/she will not be notified if payment is delayed, you will be the last vendor to get paid from his/her list.
That means setting out clear policies and penalties of late payments is crucial. Whether your business is new or established, make sure you discuss them with the clients before you clinch a deal. A good way to deal with the late payments is to include 5% penalty after two days. You can also apply the rule of a work stoppage after a month.
5. Working without a Cash-Flow Budget
You are working with the realistic expectations. You have reined your business expenses, and are making sure that your clients pay you on time. These changes will undeniably do wonders for your business success as well as long-term cash flow. However, if you don’t track the day-to-day cash flow of your business, it may still find tight spots. For example, you run a retail company, the months before the holidays can be the specific time when your business cash flow gets tight. That means you need an excess amount of supplies and inventory to face sales influx. But if the supplier payments are due before business sales happen, you can’t pay bills on time.
Here comes the role of cash flow statement that can be immensely helpful in tracking revenue inflow and expenses outflow during low sales. A cash flow statement helps entrepreneurs anticipate when their business will have more expenses than money coming in. Considering this, they can plan for tighter budgets and difficult times. Without a cash flow statement, entrepreneurs can only guess at whether they will have enough money to face penalties, past dues, and late payments.
Overall, maintaining a healthy cash flow is the key to keep your business successful. Thus, overcoming the given causes of cash flow problems will help your small business rise and shine and succeed in ways you can't image, if your small business could use help with working capital Porter Capital is available with many financing options, contact us today!