5 Costly Cash Flow Mistakes (and How to Avoid Them)
Effective cash flow management is key to your business’s long-term success – helping you ensure you have the funds on hand to cover day-to-day needs, pay for new expenses, or invest in your business.
Even if your company is doing well, a slowdown in cash flowing in can threaten your ability to meet financial commitments and take advantage of critical and profitable opportunities. To maintain control of your cash flow, avoid these five common mistakes:
1. Not Creating a Realistic Revenue Forecast
Be proactive about regularly creating and updating cash flow forecasts even before you experience a cash disruption. To ensure you have a comfortable level of funds to operate, you must first estimate expected revenue on a weekly or monthly basis based on past performances, sales cycles, economic conditions, and other factors unique to your business. Avoid overly optimistic projections by basing your forecast on historical data while also taking into account seasonal cycles.
2. Not Invoicing Quickly or Regularly
An efficient invoicing process is key, but sometimes invoicing becomes secondary to selling and completing work. This can negatively impact your cash flow and prevent you from meeting financial obligations on time. Not billing customers quickly and consistently makes them more likely to overlook or delay payment. Always bill once the project is complete and consider billing for a down payment upfront.
3. Not Securing Prompt Payments
Making it difficult for your clients to submit payments will inevitably slow down the process. It’s important to accommodate them by accepting multiple forms of payment – like cash, checks, credit or debit cards, and ACH transactions. Charging and enforcing penalties or fees for late payments are also effective tactics. Be sure to ask new customers what information they require on your invoices and how they prefer to receive them. The easier you can make the payments process, the sooner customers will be able to pay you, which can help improve your cash position.
4. Not Budgeting for Cash Flow Considerations
Even if you have a clear picture of your expected revenues and expenses, and are quickly invoicing and collecting customer payments, you could still run into hiccups if your business doesn’t have a cash flow budget. Careful planning and regular cash flow analysis are important. Track day-to-day transactions with a cash flow statement to identify patterns. Track how much revenue is flowing into your business and how much money is flowing out of your business during a set period.
5. Not Having an Adequate Cash Cushion
Every business owner will face unexpected expenses at some point. Slower-than-normal sales cycles will affect most industries and equipment will break down when you least expect it. Prepare for these inevitabilities by ensuring you have a cash reserve – savings that are equivalent to at least three months of operating expenses – that can get your company through cash flow disruptions. A line of credit is also an attractive option for many businesses, but be sure to apply for one in advance, not when you’re already in a cash crunch.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
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