Managing cash flow is only one aspect of running a small business, but it is essential that this aspect is done correctly. Many small business owners make common mistakes when it comes to managing their cash flow. Some of these mistakes have minor repercussions and can be recovered from, but some can mean the end of a business.
The Four Most Common Mistakes with Cash Flow
One of the worst mistakes small business owners make in managing cash flow is in dealing with accounts receivable. Your business is not a bank. Customers cannot and should not expect you to wait forever for them to pay you back. Make collections a priority. Set due dates, impose late fees, and enforce both. This isn’t being mean to your customers; it is the proper expectation of anyone who uses your business.
Optimism and realism need to go hand-in-hand when running a small business. Keep faith that customers will continue to come and cash will continue to flow, but temper that with realistic expectations. Do not overestimate your future sales. Be objective; use historical data and real numbers, not estimations or unsure guesses.
Prioritize the quick turn-over of inventory over having massive stockpiles. To small business owners, inventory and cash are practically the same thing. If you spend large amounts of cash at once to stockpile inventory, you will have less cash on hand until all of that inventory sells. Buying smaller amounts of inventory more frequently effectively allows you to keep more cash on hand.
It isn’t enough for only the small business owner to understand cash flow. Informing your employees about the importance of cash flow can help maintain a healthier currency. When employees understand cash flow, sales staff know not to just close the sale, but make certain invoices are paid in a timely manner. Team members know that projects need to be finished efficiently so the final invoices can be sent out.
The Best Ways to Avoid These Mistakes
Each of the problems mentioned have their own ways they can be avoided or solved, but there are two things you can do that will help address all of these problems at once. The first and best way to address cash flow problems is to hire an outside expert to come in, identify issues, and suggest ways to solve them. Another way is to purchase and consistently use accounting software to keep track of your cash flow.
Diversified Management Services, Inc. offers accounts receivables services using QuickBooks accounting software. We provide cash flow management reports to keep you and your customers on track. Contact us today for help with your small business bookkeeping.