For small businesses, cash flow management is one of the most crucial factors to ensuring success. Running a business without a healthy stream of cash can have dire consequences, in the worst case causing a company to cease trading.
A huge 60% of new businesses fail in their first three years, with 20% folding in the first 12 months. Poor cash flow is cited as one of the major causes for business termination, which is why implementing an effective strategy can prevent you from making common cash flow mistakes before it’s too late.
1. Spending too much money
Whilst it’s true that you need to spend money in order to make money, by not sticking to a budget you risk getting your business into more debt than it can handle in its early stages.
Careless overspending is a no-no, and every purchase you make should be documented in a detailed budget. It’s important to be realistic about what your business can afford and differentiate between the must-haves and the nice-to-haves.
What’s more, it’s never a good idea to mix your personal and business finances. In order to keep on top of how much is being spent versus saved, you should open a separate bank account for your business.
2. Neglecting your business’s finances
In order to maintain financial control and avoid periods of negative cash flow, money management should be a top priority. After setting up your business bank account, you should aim to monitor it on a weekly, if not daily basis.
There are lots of different accounting software and technology that allow you to track your operating expenses from one interface. Offering lots of benefits for small businesses, these platforms make managing money simpler with automated reporting and spending insights.
3. Not taking the time for year-end tax planning
Tax season can be stressful for entrepreneurs if inadequate tax planning has taken place over the year. All businesses are required to file an annual tax return in April, but poor preparation for this can result in your business having to pay higher taxes than it actually owes.
In order to stay in HMRC’s good books, don’t make the mistake of missing tax deadlines, misreporting income, or underpaying estimated taxes. Ensure you keep detailed records and evidence of all expenses, and find out what small business tax reliefs are available to help your business save money.
If your company can afford it, you might want to consider hiring a tax specialist who can ensure your records are kept in good order.
4. Putting invoice payment collection on the backburner
One of the biggest causes of inadequate cash flow is unpaid invoices. For this reason, before agreeing to work with a client you should create a contract and set out clear payment terms that will work well for your business.
There’s nothing more frustrating than late paying clients, which is why you should be proactive when it comes to ensuring your business gets paid. Unfortunately, many businesses choose not to chase for unpaid invoices, often in fear of damaging client relations.
If you find that your business regularly suffers from low working capital, you may want to consider selective invoice finance. With this option you can get quick access to the money tied up in your unpaid voices, reducing payment times from 30 days to just 1 or 2 days.
Specifically designed with small businesses in mind, this solution involves selecting invoices to sell for a small fee to platforms like Penny. They pay you instantly and then collect payments from your customers by the payment date, which means one less job for you! Find out more about instant invoice payments with Penny.
5. Not setting aside cash reserves
This common cash flow mistake ties into keeping on top of business finances and making sure you’re not overspending. Where possible, it is estimated that you should keep a cash reserve large enough to cover 3 – 6 months of expenses. These saved funds can be used to cover emergency situations and unforeseen events.
Nobody could have predicted Covid-19 or its economic impact, which goes to show that you never know what could happen tomorrow. If you don’t have a financial cushion to fall back on, it becomes difficult to deal with setbacks. As a small business it’s crucial to equip yourself for the unexpected.
For seasonal businesses, it’s even more important to make sure you’re keeping on top of the money in your company account. Creating cash flow forecasts will help you plan ahead for quieter months.
Prior planning prevents poor performance
In order to create a successful business, remember that financial planning is everything! By learning early from the mistakes that other business owners make, you can avoid cash flow issues in advance and get ahead of growing your business for the long term.