Featured image by Vladimir Solomianyi on Unsplash
Businesses run on cash. This makes it essential for business owners to have some financial management skills as cash flow mistakes can give birth to other significant problems. In fact, a US Bank study found 82% of small businesses fail due to poor cash flow management.
Business owners, especially those leading small and medium-sized companies, usually remain busy managing various responsibilities. Consequently, this keeps them away from monitoring the cash coming in and going out of their accounts. As a result, many of them also outsource accounting services. Meanwhile, some will continue to manage funds on their own or hire an accountant in house.
Regardless of your method of accounting, mistakes can occur unexpectedly. Therefore, to help you prepare a plan to take your business toward success, let’s discuss these cash flow mistakes and their solutions.
Major Cash Flow Mistakes to Avoid
Not Reviewing Financial Statements Regularly
You already know your firm’s financial information is necessary for preparing reports required by government and regulatory bodies. That information can only be obtained from financial statements. Therefore, if you are not checking your statements on a regular basis, you might be misinterpreting your business’s financial performance.
Not only that, when you are unaware of the amount of money coming in and out of your checking accounts, you would not know the status of your company’s cash flow. And until you know that, you will not be able to find cash flow mistakes.
Reviewing financial statements regularly will help you take appropriate actions to manage your cash flow. This will improve your overall financial process.
Allowing Expenditures to Surpass Your Budget
Overspending is a common problem in companies across industries. And many times, what seems like overspending actually turns out to be expenses from non-essential or even unwanted items. Sometimes necessary items or services, like commercial fleet insurance, for example, are simply paid for at the wrong time. These cash flow mistakes happen when you follow a not-so-disciplined approach to budget preparation. They can have a significant negative effect on your business’s bottom line very quickly.
However, if you can avoid spending on something that you can purchase a couple of months later, you should postpone. Moreover, excessive spending can lead to higher debts. Therefore, it would be better to prepare a comprehensive budget after considering all requirements. The most important thing to remember is to stick to your budget.
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Cash Flow Confusion
You should analyze your profit margins every month. But if you think you earn a profit every time your customers pay you, you might not be going down the right path. Cash coming into your business account and going out of it reflects cash flow. Your firm may have a positive cash flow, but you might see that your profits are lower once you create a profit and loss (P&L) statement.
Here, cash flow projection can help you avoid mistakes by helping you determine if you will have a sufficient amount of money in the business account by the next month to pay for all expenses or not. Check your P&L statements regularly. They will provide you helpful insights on profits so that you can prepare for the next month in advance.
Seeking Growth Too Fast
When your business establishes itself as a good firm in your market, you will likely experience increased demand for your product or service. If this wave rises too fast, you might not find time to see if your financial plan allows you to expand. Making decisions like hiring more employees or moving to a bigger office building without thoroughly considering your current financial health can be a mistake in terms of cash flow.
For example, you may quickly invest more capital strategically seeking growth. But if the market demand diminishes after a few months, you will have more expenses to pay every following month than you have income and profits. Therefore, the best way to manage your investments is to plan for them. And in case they require capital on an urgent basis, you may take a business loan and pay a monthly installment. This will help to prevent significant damage to your company’s cash flow.
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Failure to Consider Unpredictable Costs
During the initial days, some costs might seem small. But with time, they will accumulate and become a sum that might hamper the company’s bottom line. These costs can include business and cyber insurance coverage, debts, recruitment, licenses and permits, commercial and legal fees, and insurance accounting expenses.
These costs can represent a cash flow mistake. They can also be challenging to predict. But it is possible with company finance leaders’ excellent knowledge and expertise.
Poor Tax Management
Corporate or business taxes are inevitable. Paying taxes concerning statutory obligations is mandatory. Above all, you must file tax returns by a predefined due date.
If you fail to file taxes by the due date and there’s no announcement of an extension, nor you did you apply for one, you may be levied with interests and penalties. This could ruin your cash flow. Not meeting the deadline or filing returns with false information in a hurry can lead to an IRS audit. This could increase the possibility of additional penalties.
Hence, you should always plan your taxes and try to file returns quarterly. That way, you will be able to avoid missing deadlines and prevent fines that could hamper your cash flow.
Late Payment Problems—Both Ways
Many businesses are dealing with one of the biggest finance-related problems—not having an effective payments management process. For example, your business might be experiencing:
- Customers paying you late and affecting cash flow
- You paying your bills late, which also affects your cash flow
In this situation, the bigger problem might be not identifying late- or non-paying customers. If you don’t track the customers who do not pay on time, your firm will lose money. This mistake will result in a negative cash flow that you may be completely unaware of.
Similarly, if you don’t pay invoices on time you could be paying a price. For example, a supplier’s bill could include hefty penalties if paid after the due date. Therefore, your cash flow will be hindered due to these costs you could have avoided in the first place by making the payment on time.
Consequently, you might put your business at risk of heavy losses in the long run. To save your business, you might then take loans. Then, if things don’t work in your favor, the burden of debt can force your firm to close permanently.
Proper Cash Flow Management
Cash flow is the backbone of your business, and avoiding the mistakes discussed above can help you manage it well, keeping your firm financially stable. So monitor cash flow and P&L reports regularly. Also, when planning to expand, collect most receivables well on time, plan your taxes, and never go for a quick, unplanned expansion.
Prepare and stick to an efficient plan for cash flow management. This is because that will play a key role in helping your firm meet financial obligations. Finally, keep positive cash flow by investing wisely to unlock economic growth.