Cash flow is one of the most important factors that determine the success of a business. Regardless of the size of your business, how many people want your product or service, or how many investors you have–if you don’t have cash flow, you’re eventually going to run into some serious problems.
Many small business owners face cash flow disruptions, especially those early in their journey. Left unchecked, these disruptions could put your business in imminent danger. Luckily, many of the most common mistakes are avoidable. Here’s a look at some of the things that could be affecting your small business cash flow and tips to help you avoid them.
1. Confusing Revenue and Profit
While you might be bringing plenty of revenue into your business, it’s important to remember that your profit is what really matters. This is the amount that’s left over after you’ve paid all of your expenses and debts. It’s common for small business owners to confuse revenue and profit, causing you to believe you’re making much more than you really are.
Remember that high revenue is great, but it doesn’t mean a lot of your average monthly expenses are also consistently high. To properly manage your cash flow, you’ll need to pay attention to both your revenue and expenses and ensure you’re making decisions based on your net profit.
2. Overestimating Future Sales
Optimism is important, and having a positive attitude can help you get through rough patches. However, when it comes to small business cash flow management, it’s critical not to over-estimate your future projections.
When building sales projections, it’s always better to be a bit cautious. Feel free to set high revenue goals, but make sure your budget and cash outflow plans are based on more conservative numbers. You’ll also want to update your projections frequently, so you always have a realistic view of where your business is going.
3. Neglecting to Follow Up on Accounts Receivable
It’s far too common for business owners to get so busy running their business that they forget to actually get paid. Neglecting your accounts receivable can create enormous cash flow problems. It’s important to review your incoming payments regularly and follow up right away with customers or clients who have fallen behind.
It’s a great idea to create a late-payment and collection policy and make sure all of your customers or clients are aware of it. This will help encourage them to pay you on time and prevent you from having to fret over what to do if they don’t.
4. Forgetting About Seasonal Cash Flow Changes
Many businesses experience seasonal highs and lows. While this is perfectly normal, it’s also important to take this into consideration when creating your cash flow projections. If you base your decisions on the profits you make during your busiest times, you could end up getting yourself into trouble when the slower season arrives.
Once you understand your business cycles, you can hold over some cash to get you through your off-seasons or consider tapping into a business line of credit or short-term loan as needed.
5. Failing to Set Realistic Goals
Expecting your business to become an overnight success is a recipe for disaster. Instead of making this mistake, ensure that you’re setting realistic goals and frequently evaluating your progress. This includes reviewing your balance sheet, profit and loss, and sales and customer base.
It’s also easy to get excited and start scaling your business too quickly. While the prospect of rapid growth is certainly tempting, it’s important to take it slow and remain mindful of the process. Otherwise, you could end up in a situation where your cash outflows begin to outpace inflows.
When growing your business, it’s best to focus on increasing revenues while keeping costs relatively low. As your profits increase month over month, you’ll find yourself in a more comfortable cash flow position. Once you have a solid financial foundation, then you can start looking for ways to invest some of your profits back into your business.
Need Cash for Your Business? Contact Zinch!
Disruptions in your cash flow can have a devastating effect on small business owners. If you need some extra cash for your business, Zinch is here for you. We offer a variety of small business financing solutions to avoid cash flow disruptions.
Contact us at (714) 500-6622 to learn more about your options. You could qualify for up to $250,000 in just 24 hours.
