Cash flow is an essential factor for the success and sustainability of any business. It refers to the movement of money in and out of a company, including revenue, expenses, and investments. Consistent cash flow allows businesses to cover their day-to-day expenses, maintain operations, and plan for future growth.
Even small mistakes in managing cash flow can have significant impacts on a business, reducing its ability to function efficiently and potentially leading to financial struggles. In this article, we will discuss five common cash flow mistakes that businesses make and how to avoid them.
Businesses generate a lot of data, and it can be overwhelming for small business owners to keep track of everything. However, failing to monitor cash flow regularly can lead to severe problems down the line. By not having a clear understanding of their cash flow situation, businesses may overspend or miss opportunities for growth.
To avoid this mistake, businesses should establish a system for regularly tracking and monitoring their cash flow. Cash flow statements are the foundation of this system, providing a snapshot of the company's current financial state.
These statements should be reviewed at least monthly to identify any potential issues and make necessary adjustments. Accounting tools, such as Xero or QuickBooks, can also be used to automate the process and provide real-time insights into cash flow.
There are a range of strategies businesses can implement to improve their cash flow monitoring process. These include:
Optimism bias can often lead businesses to overestimate their future sales, resulting in unrealistic cash flow projections. This mistake can be detrimental as businesses may rely on these projected income figures to make critical financial decisions, such as overstocking, investments or loan repayments.
To avoid this error, businesses should base their sales projections on historical data and market trends rather than solely relying on optimism. It is also crucial to regularly review and adjust projections as necessary to reflect any changes in the market or business operations.
Conservative estimates can help businesses avoid overcommitting and ensure that their cash flow remains healthy.
Here are some strategies businesses can use to create more accurate sales projections:
These strategies can help businesses create more realistic and accurate sales projections, leading to more informed financial decisions.
Inevitable expenses, such as unexpected repairs or bills, can quickly disrupt a business's cash flow if there is no reserve to cover them. A lack of a cash reserve can lead to missed payments, late fees, or even the inability to operate.
To avoid this mistake, businesses should aim to have enough cash in their reserve to cover at least three months' worth of expenses. This reserve provides a safety net and allows businesses to continue operations even during lean periods or unexpected events.
An emergency fund is also a crucial component of financial planning, both for businesses and individuals. By having a buffer to cushion unexpected expenses, businesses can avoid relying on credit or loans to cover these costs.
To build a reserve, businesses can set aside a portion of their profits each month until they reach the desired amount. The cash reserve should be kept separate from the operational funds and only used for emergencies.
We've laid out some strategies below that can help businesses build and maintain a cash reserve:
Here are some strategies businesses can use to build a cash reserve:
By building and maintaining a cash reserve, businesses can have peace of mind knowing they have the means to handle unexpected expenses without disrupting their operations.
Credit checking should be part of the onboarding process for new clients or customers to ensure that businesses are not extending credit to individuals or companies with a history of late payments or defaults.
Extending credit without proper checks can put businesses at risk of bad debt, where they are unable to collect payments owed. This can significantly impact cash flow and hinder a business's ability to operate and grow.
Failing to do proper background checks can also result in delayed or missed payments, affecting the business's cash flow. It can also lead to potential bad debts, where businesses are unable to collect payment for services rendered.
However, there is no reason that credit checks should be limited to new customers. Regularly reviewing the payment history of existing clients can help businesses identify and address potential issues before they become significant problems for cash flow.
Here are some strategies businesses can use to conduct credit checks effectively:
Putting in place proper checks and processes for credit checking can help businesses mitigate the risk of bad debt, maintain healthy cash flow, and make informed decisions about extending credit to customers.
Optimisation of accounts receivable is crucial for maintaining a healthy cash flow. If businesses do not have an efficient process in place to track and collect payments from customers, they may experience significant delays or even non-payment.
To avoid this mistake, businesses should clearly outline their payment terms to clients and regularly follow up on outstanding invoices. Using automated reminder systems, such as Chaser, can help streamline this process and ensure that payments are received promptly.
Automation allows AR professionals to focus on high-risk accounts and build stronger relationships with clients, ultimately improving cash flow without adding additional administrative burden.
Having a solid and comprehensive credit control policy in place can also help businesses manage their accounts receivable efficiently. This policy should outline the steps for managing late payments, including when to escalate the issue to a debt collection agency.
Here are some strategies businesses can use to optimise their accounts receivable process:
Implementing these strategies can help businesses optimise their accounts receivable process and improve cash flow. By staying on top of payments and having a clear policy in place, businesses can minimise the risk of non-payment and maintain healthy cash flow.
Managing cash flow is vital for the success of any business. By avoiding these common mistakes and implementing proactive measures, businesses can secure a stable cash flow and continue to grow and thrive.
Regular monitoring, realistic projections, maintaining a reserve, credit checks, and optimising accounts receivable processes are all crucial components of effectively managing cash flow.
Remember that small changes in daily operations can lead to significant improvements in cash flow and, ultimately, the success of your business.
For more strategies on how to improve cash flow and grow your business, check out the Chaser blog. To learn more about how Chaser can help automate your AR process and improve cash flow, book a demo with one of our experts or start your no-obligation 14-day free trial today!