4 Common Cash Flow Mistakes that Small Business Owners Make
Running a business requires a lot of financial planning as financial health is essential for businesses. Similarly, to the human body, without a proper flow of money, the business will experience many problems. One of the most common reasons for the failure of a small business is poor management of finances, so you must pay attention to this.
We've compiled a list of the most typical monetary blunders made by business people. Take a look below, and make a note of them so you can avoid them.
1. The Impossibility Of Budgeting Realistically
Many people who start small businesses underestimate the start-up costs and have cashflow issues. It is best to make your estimates a bit higher than reality to avoid unpleasant occasions.
Additionally, underestimating how long your company may take to make a profit may result in severe cash shortfalls. Therefore, estimating a realistic timeframe for your firm to achieve profits is essential. Also, remember that seasonality will affect your sales.
Small businesses sometimes put off hiring a tax professional, but this can be costly. Working with a tax expert who knows your business and your industry can save you significant time and cash.
2. Not Creating A Cash Flow Budget
In addition to a business budget, you should create a separate cash flow budget to understand when money will flow in and out of your bank account and plan accordingly. Cash tied up in deferred instalments isn't helpful to your suppliers when they have to get paid now. You must ensure that you always have enough money to continue operations, so creating a cash flow budget is vital.
3. The Invoicing Process Is Slow
One of the easiest ways to maintain a healthy cash flow is to get paid promptly. However, this is partially under your control, and there are several things that you could do to help encourage clients and customers to pay more quickly.
Before signing a contract with a client, ensure payment terms have been discussed. Both parties should understand the following:
- What is the invoice handling procedure?
- How soon will it be sent?
- What is the payment deadline?
- Payment method. It's also important to check who should handle any issues.
Next, make sure to send your bills out on time. Ensure all details are in order so there won't be any unnecessary back and forth.
Finally, keep a close eye on deadlines, be bold, and send a polite but firm reminder to customers who are cutting it fine. Consider introducing a late payment charge to incentivise them to cough up on time, but give your customers plenty of notice.
4. Not Keeping A Cash Reserve
An emergency fund is crucial for good cash flow management, and many small business owners need to pay more attention to this step. However, unexpected expenses will occur at some point, so it's best to be prepared. So, build up cash reserves to smooth over the problems. That way, you can avoid getting into debt and experiencing a lot of stress.
Managing the finances of a company can be difficult, but it's also imperative. Wisely planning your expenditures will help to avoid wasting money. Be aware that profit is not the same as cash, so create a separate budget for the cash inflow. Cash flow management and keeping track of your finances are vital, so make sure to consult an accountant if you need help.
For UK small businesses, you can find out how Jo and the team at Financial Fitness Instructor can help you here.