Top 5 Cash Flow Mistakes Small Business Owners Make

In this blog, we discuss all the common Cash flow mistakes that small businesses make. No matter how great your business model is, how profitable you are or how many investors are interested in supporting your business, you can’t survive if you can’t manage your company’s cash flow.

In fact, a prominent study from the financial services company U.S. Bank found that as many as 82 percent of startups and small businesses fail due to poor cash-flow management.

So, even if you’re a brilliant entrepreneur in every other way, you must stay squarely focused on managing your company’s cash flow to avoid putting your business in imminent danger.


Small Businesses Cash Flow Mistake #1: Forecasting unrealistic sale

Relentless optimism is a key trait of successful entrepreneurs. After all, what realistic person would persevere in the face of so many obstacles, so many naysayers and so much stress? But while optimism is critical for a new business owner, letting it compromise your objectivity can be dangerous to your cash flow.

Unfortunately, not every interested looker will actually make a purchase. While your sales volumes may increase over the holidays, expecting them to double is a little unrealistic.

That’s why it’s so important to complete objective and realistic sales forecasting based on historical evidence and real numbers. By applying quantitative forecasting methods, you can use actual past revenue data from your own business or other businesses in your industry as a basis for tracking trends and predicting future sales. This information, along with some objective intuition, will help you come up with more realistic future sales projections.

Small Businesses Cash Flow Mistake #2: Credit Control

One of the fastest cash-flow killers — particularly for small B2B businesses — results from unpaid invoices from clients and Not being strong enough with credit control and getting in customers money. If you aren’t being proactive about collecting payments from your clients, you could be on your way to a dangerous cash-flow situation.

Sadly, small businesses that don’t have solid late-payment penalties and collections policies in place are often taken advantage of. If your clients don’t know for sure that they’ll hear from you the moment a payment is late, you’re sure to be the last of their vendors to get paid.

Small Businesses Cash Flow Mistake #3: Not controlling expenses

And spending more than need to especially at the beginning of setting up a business.

“It takes money to make money”: We hear this saying so often in business, and in many ways it is true. But, unfortunately, this common belief can make many a rookie entrepreneur fall prey to gross overspending — especially in the first few months of business.

The reality is that while, yes, it does take money to make money, not all startup expenses are created equal. Starting a business involves plenty of clearly beneficial expenses — costs that will benefit your company’s profitability in measurable ways. But there are also plenty of consultants, advisors and B2B service providers who would be happy to take your startup’s capital for things you don’t actually need.

If you want your business to make money, then, keep your eye on the bottom line, considering the cost-benefit of every single expense. After all, every pound £££ you spend on your business is a pound £££ that is ultimately taken away from your profit margin.

Small Businesses Cash Flow Mistake #4: Not using Cash flow budget

So, say you’ve set realistic expectations for future sales. You’ve reined in spending, and you’re doing everything possible to make your clients pay up. These three changes alone will do wonders for your company’s long-term cash flow. But without tracking your day-to-day cash flow, you may still find your business in a tight spot.

For retail companies, the months just before the holidays are a time when cash flow can be particularly tight. You need more inventory from your suppliers to prepare for an influx of sales, but if those supplier payments come due before your sales actually happen, you may have trouble paying bills on time. Not keeping cash to one side for payments such as vat (if applicable), Corp tax and any other bills that may randomly crop up is a very common mistake by small businesses.

Small Businesses Cash Flow Mistake #5: Ignoring seasonal traits of businesses

No matter how many safeguards you have in place to protect your company’s cash, hiccups in cash flow are a business reality. This may be no big deal if you have a cushion of savings on hand. But if your company is working from a zero account balance, one slow sales month could mean instant disaster. Ignoring seasonal traits of the business and not keeping cash set aside for quieter months is another mistake that can lead your business into cash flow problems.

Cash-flow issues are one of the greatest challenges of business ownership. But if you stay objective about your business, rein in unnecessary spending and stay alert to potential pitfalls, you’ll be head and shoulders above your business peers in your potential for long-term business success.

At Prosper Bailey Accountants, we help small businesses with cash flow management. Happy to help if you need professional advice.

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