In business, cash flow is king. It’s the movement of money into or out of a business and it’s essential to solvency. Having ample cash on hand will ensure that creditors, employees and others can be paid on time. If a business or person does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue.
In today’s tough economic times, avoiding cash flow mistakes is more important than ever.
Here are some of the most common ones:
1. Tying up all your cash
Liquidity is critical to business survival. Make sure you plan an annual cash budget that takes into account seasonal ups and downs in the business. Avoid buying equipment or making other long-term capital improvements with cash. Rather pay for the equipment or improvements over several years, matching the financing to the life of the asset.
2. Paying creditors too quickly
Meeting your financial obligations as quickly as possible can work to your disadvantage. Many vendors offer 30-day-or-longer payment terms. This is like an interest-free loan, so take full advantage of your creditors’ payment terms.
3. Granting credit too easily
Get complete credit information and credit references from the customer before you make the sale. Don’t think you can’t check references or research payment history because you are a small business.
Pulling credit reports from credit bureaus is a worthwhile expense and one that will protect your business in the long-term. After all, if you are going to offer 30-day payment terms, your customer better be worthy. And don’t be lenient with credit just because a customer is a friend or family member – ever.
4. Ignoring personal cash flow
Apply the lessons you are learning in your business to your own cash flow. Focusing on business goals should not be your only priority as your could seriously damage your own financial future. Make sure that you are building a solid, separate financial foundation outside of the business – a nest egg where you save bonuses or dividends.
5. Not monitoring accounts receivable
One of the biggest mistakes businesses can make is to neglect accounts receivable. Review these at least once a week to ensure that you are receiving payments from customers. If they are taking too long, you will need to take measures to speed up the payment process.
6. Tying up your cash in inventory
Poor inventory management can swallow up a lot of cash and leave the business with more inventory than it needs. Of course, you don’t want to have too little inventory either, as that will leave you unable to fulfil orders.
The key is to accurately forecast sales, which can be used to predict the required inventory levels. You can also try inventory management practices such as just-in-time inventory management, where the business procures inventory just in time to make the sale.