4 Critical Cash Flow Mistakes Most Small Business Owners Make
Is there anything more important than cash flow? If you ask business owners, they’d say that cash flow is one of the most crucial aspects in business, along with small business financing. But sadly, many business owners fail in properly managing cash flow.
A study from the U.S. Bank says that 82% of startup companies and small businesses fail because of poor cash flow management. Even if your business generates massive amounts of profit or you have a great business model, your business will not fail if you don’t know how to properly manage cash flow.
Related: What You Need to Know About Cash Flow
To equip you on how to properly manage your business’ cash flow, here are the top four critical cash flow mistakes most small business owners make:
1. Not Paying Attention to Customer Demographics
To generate revenue, businesses need to attract new customers. However, it can be challenging to market to potential customers if you don’t know who to target. With that said, it’s important you know who your customers are by creating an ideal customer profile.
An ideal customer profile is a thorough description of the type of customer that would benefit most from the products or services you offer. The customer profile you create will be the basis upon which all of your marketing efforts will be carried out. So, it’s important to be as accurate as possible. And as always, be sure to base your information on facts rather than hunches.
By knowing your audience, you’ll be able to increase your marketing ROI and help predict demand for the products and services you offer.
2. Spending Too Much When You Receive Funding
Let’s face it; you need to spend money to make money. Small businesses need equipment, technology, office supplies, and efficient staff members in order to function properly. However, it’s important you remain practical when purchasing items for your company.
Don’t burden yourself with unnecessary expenses, but rather start with the basics and work your way up as your business grows. If your business is product-based, it’s important you regularly check your inventory. Knowing what you currently have, as well as what you will need on a moving forward basis will prevent you from over-purchasing supplies.
To better manage cash flow, best you keep your personal and business finances separate. This makes it easier for you to track how much money you’re earning and how much you’re spending. A good procedure to follow is to keep track of your expenses by listing them and using a business bank account solely for this purpose. Doing this will let you easily identify more opportunities to save money.
Related: 6 Tips to Keep Track of Small Business Expenses
3. Not Giving Much Thought to Overdue Invoices
Following up on pending invoices can be an overwhelming hassle for small business owners who have a lot on their plate. However, failing to be proactive in collecting payments from clients is one of the most common mistakes entrepreneurs make.
If small business owners don’t implement late-payment penalties, clients may take advantage of them. To prevent this from happening, be sure you set clear policies on how to handle lay payments, such as enforcing a late-payment penalty after seven days and, or a work stoppage 30-days past due date. Additionally, make sure to organize your invoicing process by creating an internal timeline. A worthwhile practice is to take note of when your initial invoices are mailed, followed by payment reminders at least a week before the due date.
4. Operating Without a Cushion of Cash on Hand
Small business owners implement various safeguards in an attempt to protect their company’s cash. But sadly, cash flow hiccups are a part of running a business. To prevent cash flow issues from stealing your peace of mind and weighing down your company, a cushion of cash on hand can go a long way to remedy this kind of fallout. Think about it, if you operate from a zero account balance, what do you think would happen after a single month of slow sales?
Protect your business from cash flow issues by maintaining cash on hand that’s equivalent to at least two months of daily business expenses. This way, even if there are a few bumps along the way, you’ll have your cash reserve to fall back on, which will protect your company.
For some startup companies and small businesses, maintaining a cushion of cash on hand may not be feasible. Fortunately, when this is the case, a business line of credit is the perfect solution for business owners in need of a cash reserve.
Related: Why New Businesses Should Apply for a Business Line of Credit
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Cash flow problems are one of the main challenges business owners face. But if you steer clear of the obstacles mentioned above, you’ll be able to minimize cash flow issues and lead your business to success.