A small business endeavor can be an expensive and long-drawn process, and most don’t comprehend the time, money, patience and effort it takes to start and maintain a successful business. From staffing, management, financial, planning, strategy, to daily operations, and marketing, there are a lot on your table. You’re responsible for the financial health of your business, establishing budgets and sales forecasts to ensure the business meets them. Managing your business’s finances can be an overwhelming process if you’re not a financial expert.
Cash flow is the lifeblood of any business and low cash flow is the biggest challenge for most small business owners and the most common reason for business failure. With that said, it’s imperative for small business owners to be prepared for potential gaps in operational cash, slow sales season, and unforeseen expenses.
With thorough research and smart approach, you’ll be able to effectively manage your business cash flow, and prepare for the foreseeable slow months, and prosper. Here are five common small business cash flow mistakes you should avoid to keep your finances in order and grow in the coming years.
- Control Overspending
The first thing to look for is to cut your overspending. Stop paying unnecessary expenses to increase cash flow. It’s enticing to upgrade your office space with trendy artwork, new commercial tools, and workstations, but buying such expensive and unnecessary things come with a hefty cost.
Instead of buying expensive supplies and materials, bring in secondhand commercial equipment and materials. Holding off upgrades and expensive supplies can help free more cash flow.
- Avoid Unnecessary Inventory
Avoid excessive and unnecessary inventory to free cash flow. Such excessive inventory that is not liquid can be a liability for your business. The use of effective inventory management not only cost-efficient but also improves cash flow. The key is to factor inventory into your cash flow management since it directly affects your sales and expenses, and both of these elements take into account how much cash you have on hand. Start creating a periodic inventory inspection schedule, regularly review your sales reports and projections, use clearance sales, and eliminating poorly selling products that can lead to better cash flow management.
- Unpaid Receivables
If your business functions on an invoice-based payment system, unpaid or late invoices can seriously hurt your cash flow. To avoid unpaid receivables, use upfront payments system or ask for a down payment if possible. Using incentives like early pay off discounts to your receivables can help reduce the unpaid receivables if an invoice system is fundamental to your business model. Before dealing with customers, use business credit checks to ensure they have a positive payment history and to protect your financials and cash flow.
- No Access to Business Credit
No access to small business credit in times of need can also hurt your cash flow significantly. You might experience a situation when your expenses exceed your available cash. In such circumstances, getting a working capital loan can help you ride out a cash flow storm. Short-term business loans, business lines of credit, and invoice factoring all provide quick access to a cash cushion as and when it’s needed.
- Spending Beyond Your Budget
Planning and creating a small business budget and hold onto it isn’t just for businesses who’ve brushed against hard times. A budget is not only a stress reliever, but also help you build savings, meet long-term financial goals, get out of debt and build self-discipline. If you are spending beyond your budget, it will quickly lower your cash flow reserves. The key is to create a projected budget by incorporating sales and expenses since you can’t always be prepared for unforeseen or unexpected expenses.
Regularly review your operating budget and fine-tune it to stay on the button. Creating such projected budgets will help you prepare your finances for times of low cash flow, low sales or economic changes.