Have you ever thought about how a business can technically be making a profit on paper, and yet be running out of money?
How is this possible? Quite simply it is because of poor cash flow management. Unfortunately, the money people owe you isn’t automatically converted into cash that you can use to pay your own expenses. This can be very frustrating. And harmful.
Cash flow management basically means to make sure that the money coming in to your business is more than the money going out. In other words, your inflow versus your outflow.
There are some common cash flow mistakes to avoid so you don’t end up in a prickly situation where you’re unable to cover your expenses, even though business is going well.
Mistake 1: Not looking ahead
The first step to properly manage your cash flow is to know what your situation is and where you’re headed. It is very important that you are making thorough projections of where your cash flow will stand quarterly and annually.
Are there any icebergs ahead that you need to start preparing for now? Is there a winter spell that you need to start squirreling away for so long? You want to make sure your business finance matters are equipped to handle what is ahead.
Mistake 2: Being more stocked than you need to be
Of course you need stock and supplies, but if you’re placing bigger orders at a time than you need, than you cash flow might suffer. Rather buy stock as you need it. On a related note, don’t hold onto old stock too long. Keep the wheel turning, so know when to cut your losses and sell your stock at a reduced price.
Mistake 3: Not maximising your receivables
Yes, it would be nice to be making more business, and while that might help your cash flow, it’s not what we mean by maximising your receivables.
Basically, you want to make sure that you’re receiving as much of the money you are owed, so that you have usable cash.
There are various ways to do this. Make use of an online payment solution such as a debit order facility to automate payments. Motivate your clients to pay early by offering discounts for early payment. Also, think twice about offering clients the chance to pay on credit. If you do, make sure you run a credit check first, and if you get consistent problems from certain clients, insist on pay-on-arrival.
Mistake 4: Not inspecting your outflows
While you want to increase your inflows, you also want to minimise your outflows. The most important thing to do is to work out a budget, and then stick to it!
If cash flow is a problem for you, or if you know that you’re heading into a dry spell, spread your payments out. Speak to your vendors or suppliers about putting stock on credit or paying later. Perhaps you can put a certain expense on hold until you’re in a more comfortable situation.