Cash flow management mistakes can throttle business growth. They’re also incredibly easy to make and can go undetected until serious issues arise. They’re one of the reasons why 90 percent of small businesses sought emergency funding during the pandemic, per the Federal Reserve Banks Small Business Credit Survey, and why even lesser cash flow problems can leave a seemingly successful business without working capital to cover payroll or purchase inventory under ordinary circumstances too.
However, you can avoid most common cash flow mistakes, so your business is prepared for unexpected expenses and has the cash it needs to grow. In this article, we’ll look at seven cash flow issues routinely seen in midsize and small businesses so that you can safeguard yours against them.
1. Paying Too Much Attention to Profit
While profit is a key indicator of financial strength, it’s not everything. “It is quite possible for a company to report profits but go out of business,” explains Aretha Boex of the Nebraska Business Development Center. “It is also possible for a company to be profitable and not be able to grow, secure financing, or attract investors.” With that in mind, it’s important to monitor your profit margin and business cash flow equally.
2. Not Actively Requesting Payment of Receivables
Sending out invoices has become such a routine activity for small-business owners that many don’t realize they’re extending credit, let alone verify the creditworthiness of customers before doing it. Start thinking of your accounts receivable as a short-term loan. Set payment terms that benefit your business. If you’re currently waiting 30, 60, or 90 days, reduce the span to days or weeks to accelerate your inflows. To speed payments further, consider adding penalties for late-payments and discounts for early payment.
3. Not Monitoring Cash Flow Properly
It’s hard to have effective cash flow management if you do not measure your inflows and outflows to begin with. So, if you aren’t currently using a cash flow statement to monitor your cash outflow and inflow, start now.
Although one of your most impactful financial statements, a cash flow worksheet is easy to create. Excel even offers a free basic template to get you started, but you may want to select specialized software that can tackle your cash flow forecast as well. This is a helpful tool, as it can help you visualize how much cash you’ll have on hand at any given point in time so that you can make the most of it.
4. Failure to Monitor Inventory Levels
While many business owners worry about running out of inventory or not having enough to take on a large order, having an oversupply is just as worrisome. Items collecting dust on the shelf represent money that could otherwise be generating more revenue for your business either through growth activities or investments.
Although the “right amount” of inventory to keep on hand will vary by business, industry, season, how long it takes to procure materials, and other factors, you’ll generally get a feel based on historical data and regular tracking.
5. Paying Certain Liabilities Too Early
It’s important to pay your vendors in a timely manner for the sake of maintaining good relationships, and it’s good practice to cover general operating expenses as your terms dictate to avoid late payment penalties. Because of this, many business owners get in the habit of pushing out all upcoming payments as cash flows in. However, this creates a problem similar to inventory overstock if payments are being made too early. In addition, the money you’re pushing out might be better spent elsewhere or could generate interest if invested.
6. Not Preparing for Slow Periods
Seasonality impacts most businesses but manifests itself in different ways. For example, retail typically peaks in the fourth quarter. Logistics and transportation companies that support the industry often ramp up around the same time, though international shippers often see increases starting during the summer. Much focus is placed on the peak periods, but the slow periods are often overlooked. It’s important to remember that the income you make during a peak season needs to carry you through your slow season. You’ll need to have surplus available to help you ramp up when the busy season kicks in again too. Effective cash flow management is paramount here. Rather than spending, you may want to find ways to put your money to work for you while ensuring it can be tapped into as employees need to be paid and expenses accrue during the slow period.
7. Improperly Managing Taxes
More than 90 percent of business owners overpay their taxes, according to Forbes research. For this reason alone, it makes sense to work with a tax professional. However, taxes are likely one of your most significant expenses and a significant source of stress, too, so even if you’re certain you’re one of the ten percent in the clear, it may be worth getting some help regardless. A specialist will help ensure your business is set up in a way that minimizes your tax liabilities and keeps you on track for deadlines throughout the year. Plus, they’ll have a wealth of business tax tips that are specific to your company so that you can keep more money in your pocket.
Improve Your Cash Flow with Invoice Factoring from Charter Capital
Even if you avoid all the common cash flow management mistakes, you may still find yourself short on cash from time to time. Invoice factoring can help in these situations by offering you same-day payment on your B2B receivables. Then, you can spend the cash in whatever way makes the most sense for your business while Charter Capital waits on payment from the client. Want to learn more or find out your rate? Get started with a free quote.