The 5 Worst Cash-Flow Mistakes Small-Business Owners Make


However, it only you clients who were deemed credit risks to begin with. Keeping good accounting records does not help your business unless you review your financial statements regularly. Unfortunately, many business owners ignore this task and review financial statements only when they have financial problems. Reviewing your financial statements allows you to identify potential problems before they happen. If the cost of debt is too high and takes most of your revenues, consider refinancing the loan.

Zach has developed and sold multiple successful web properties and manages marketing for multiple clients in the outdoor industry. He has published business content in Angling Trade Magazine and writes white papers and case studies for multiple corporate partners. Cash flow refers to the total amount of money flowing in and out of a business. In every company, there are important decisions to be made on a daily basis. Some decisions are mundane and have only short-term consequences. Others are strategic and can affect the company’s performance and profits for years.

Cash Flow Analysis

If you are unable to restructure payment dates, consider restructuring payment costs. You can do this by meeting with new vendors that can potentially provide inventory and supplies at a better cost. Arora said that even if you are not looking to replace your current vendors, you can use the information from competitors as leverage to get better pricing. Sales are obviously the best way for a business to gain cash flow. If you’re not generating sales, you’re not really a business. It’s important to have detailed budgets and to curb unnecessary spending. As the year unfolds, you should update your cash flow projections to accurately reflect developments in expenses and profits.

  • Using a cash-flow statement will help you track your inflow of revenue and outflow of expenses during a specific time period.
  • You can plan for expected overhead such as rent or utilities, supplies, and salaries, but the sudden loss of a repeat customer or unexpected equipment breakdown can throw your business off balance.
  • While your business may offer clients 30- to 60-day payment terms, you may need the money sooner in order to pay bills, order inventory, etc.
  • Receivables, for those unfamiliar with the term, is a balance of money due to a company.
  • Cash is the most liquid asset, followed by short-term receivables.
  • And in extraordinary situations, it can help you predict how scaling back will affect your business.

To generate credibility with vendors and reduce expenses, pay invoices on time and take advantage of early payment discounts. For example, you might sign long-term contracts in exchange for lower prices.

Consider loan options.

By cash flow problemsing projected cash flows, business owners can set aside the cash they will need for expenses and can manage business activities accordingly. As with cash projections, a cash budget should be created 6-12 months in advance and adjustments made as needed based on actuals. It’s not enough to create a cash flow statement and understand your current cash position. One reason so many small businesses run out of cash is that they do not forecast and budget for future cash needs.

This may vary depending on your business though, so it’s best to calculate your own cash flow to understand your business’ unique situation. Even if you don’t consider yourself a “money person,” you will have to do some basic business accounting in your business. If you don’t, you could find yourself in situations where you don’t have any money to continue operating your business.

Causes of cash flow problems

An owner of a business can gain insights into potential liquidity issues by performing a periodic cash flow analysis. In addition, by monitoring liquidity and solvency ratios it is easier to obtain funding from creditors who will do this type of analysis when deciding whether or not to offer credit facilities.

What are the most common causes of cash flow problems?

  • Poor financial planning. It's said that failing to plan is planning to fail.
  • Declining sales or profit margins. Declining sales can have a devastating effect on your cash flow.
  • Consistent late payments.
  • Poor inventory management.
  • Inflexible funding facilities.
  • Seasonal variation.

The dangers of cash flow problems to a new business are obvious. But even established businesses need to monitor how well cash is flowing in and out of the business, so as to avoid encountering some of these and other cash-flow-related problems in the future. Apply for loans.Bankers, lenders, and investors usually analyze cash inflow related to operating activities to make a decision about investing and financing your activities. Sometimes borrowing money can be a temporary fix until your business is healthy enough to make it on its own.