A strong cash flow management strategy is one of the key elements to achieve success. As money comes in through sales, you will have to plan for future expenses, investments, and unforeseen purchases.
Your liquidity is a good reflection of the overall health of your business. You can achieve a healthy cash flow with careful planning and sound accounting practices. Here are four common cash flow mistakes and how to fix them.
Not Working With Realistic Estimates
Planning for future expenses requires you to assess how much cash you will take in through sales. If you overestimate how much you will earn in the near future, you could end up overspending or not putting enough money aside to cover all your upcoming financial obligations.
A common mistake is to assume that customers will pay their invoice in time, or that you will achieve a 100% collection rate on your invoices.
If you are working with sales projections to assess your future cash flow, make sure you use realistic estimates. Use historical data to assess seasonal sales patterns, and use data from other businesses in your industry with a similar size. If you’re making growth estimates, use realistic numbers, and create different scenarios.
You can create realistic estimates by planning for different scenarios, leaving a margin for unforeseen expenses, and making reasonable growth projections. Don’t hesitate to limit your spending or work with a wider margin until you have more historical data you can use.
Using The Wrong Budgeting Approach
A common mistake that business owners make is to plan their spending based on their current sales numbers. It’s a risky approach because you’re spending money that you’re assuming will become available in the near future.
Your current sales numbers aren’t an accurate reflection of your incoming cash flow. You could lose money through unpaid or late invoices, or have to issue a large refund if there is an issue with a product.
Plan your spending and budgeting based on your cash flow. You should track your daily cash flow and adjust your budget based on the cash that is available.
We recommend that you create detailed cash flow statements and update them daily to keep track of the cash available and upcoming expenses.
Prioritizing cash flow in your accounting gives you an accurate idea of what your cash flow pattern is and you can plan future expenses around these patterns. Relying on cash statements for budgeting will prevent you from spending money that isn’t available, and you can use that information to make the best decision possible for future spending and investments.
Not Focusing Enough On Your Invoicing Process
Your invoicing process is closely linked to cash flow management. You might be tempted to use an automated tool to issue invoices and collect payments while you focus on other tasks.
It’s true that technology is making invoicing easier than ever before, but you should still keep an eye on your invoicing process.
It’s important to know what your collection rate is, and to take steps to improve it. Your invoicing process can give you an idea of the revenues you can expect in the near future, but keep in mind that your invoices aren’t necessarily an accurate reflection of how much cash you will get.
You should keep track of due dates to get an idea of when funds will become available, and when you will be able to make purchases or investments.
Leave some breathing room in your financial planning by creating a cash cushion. You might end up with a customer who doesn’t pay an invoice or have to issue a refund if there are issues with the goods or services you offered.
You should look for ways of improving your collection rate and collection time. Consider sending reminders when an invoice is due, offering payment plans, and charging late fees to encourage customers to pay on time.
Invoice factoring is a strategy you should consider if you’re encountering cash flow problems. Invoice factoring services will purchase your current invoices and give you a cash advance. Using an invoice factoring service gives you access to your cash immediately, and you won’t have to wait for customers to pay their invoices. The invoice factor service takes on the risk of unpaid invoices, which allows you to focus on other tasks if you find that collection is taking up a lot of your time.
Failing To Establish Safeguards
Your cash flow management strategy needs to include safeguards. A lot of unforeseen things can happen!
You could end up with a low sales number for a number of reasons. A competitor could release a new product that causes you to lose out on some sales, you might encounter issues with a distributor, or a natural disaster could impact sales.
You might need to make a large purchase to get the materials you need to fulfill a large order. You might lose money due to an unpaid invoice or having to reimburse a purchase made with a stolen credit card. You might need to spend money on repairs for a major piece of equipment or have to pay the deductible for an insurance claim.
Working with a tight budget leaves you very little room to recover in those situations. You should budget with a margin that allows you to absorb the loss in these different situations. If you don’t already have an emergency fund for unplanned expenses, creating one should be a priority.
You should also adopt a flexible approach to financial planning and rethink your purchases and investments based on the cash that is available. Budget for major purchases and financial obligations ahead of time so that you’re not waiting on cash flow to take care of expenses when they are due.
A strong cash flow management strategy will support growth. Take a look at your current budgeting and cash flow management practices and look for ways of improving them. You should also assess your current invoicing process, determine whether or not financial safeguards are sufficient, and look for ways of creating more accurate estimates you can use for financial planning.
Grey manages content and digital marketing initiatives for altLINE, a division of The Southern Bank Company. altLINE offers specialty commercial lending products to businesses nationwide. He has over 5 years’ experience in small business operations and content marketing.