Keeping Your Cash Flowing by Avoiding These Mistakes
“You need money to make money.” So the saying goes. And this is very true for small businesses. You need cash to fuel your operations and keeping the ball rolling. As an entrepreneur, there may be problems with your business’ cash flow due to seasonal factors, as well as gaps between your collection and capital needs.
When the flow of cash falters, a business with excellent prospects may be forced to stop operations and close down. On the other hand, being able to manage your cash flow will help you grow your company and achieve a better financial position.
To avoid “near death experiences” for your small business, it is good to be aware of potential pitfalls that you can avoid with regards to your cash flow:
- Failing to plan. Aside from planning your day-to-day operations, you also need to have a cash flow projection, listing future expenses and income, as well as setting something aside for emergency expenses. Understanding how cash ebbs and flows in the business can help you know when you are likely to have liquidity problems and enable you to act early.
- Spending impulsively. A cash flow plan can also help forestall the temptation of spending for things that you currently cannot afford, cash flow wise. With a cash flow plan, you also avoid the mistake of buying assets that do not translate to a positive cash flow. You need to implement a system where all expenses have a defined reason and are carefully reviewed before they are approved.
- Not watching the credit you extend and your receivables. For one, do not be tempted to extend credit to new customers without checking their creditworthiness. Secondly, do not let your receivables age – make your collections more efficient. Your invoices should be sent to customers promptly, with regular follow-ups to customers who may be running late on their payments.
- Being too good a customer. It’s good to pay your bills on time. But paying your bills way before these are due may not be good for your cash flow. It can be tempting if a vendor offers discounts for early payment, but you need to evaluate whether your level of cash is able to accommodate that early payment.
- Poor inventory management. The principle is to have just the right amount of inventory for your operations – not too much and not too little. Having too much inventory will mean your cash is tied up on raw materials you do not yet need while having too little inventory may mean that you cannot keep up with your orders on time.
- Not looking at other sources to respond to opportunities. As an entrepreneur, you need to be quick to grab opportunities as they come. Refusing an order due to cash flow issues may mean that you are hampering your company’s growth, as well as the chance to add to your roster of clients. This is where having a business line of credit or getting a working capital loan can help. This can help provide “emergency CPR” to keep your business going and growing.