According to a recent study by a global Bank, 82% of small businesses fail because of poor cash management skills or poor understanding of cashflow. Don't let yours be one of them!
Here are four common – and costly – cashflow mistakes. Are you making any of these?
1. Omitting to analyse your expenditure
You should review your expenses regularly, including rent, inventory, salaries and wages, taxes and debt payment. What's right for your business will depend on what you do. For example, a local B2C business might choose to pay high rent for a prime location with high footfall, while a B2B wholesaler can save on rental costs by choosing a cheaper out-of-town location.
Benchmark your spending against competitors and other companies of a similar size and life cycle. Consider the potential return on every penny you spend, and trim any unnecessary expenditure.
Create a strategic forecast to help guide your budget. Record the amount and date of all your upcoming cash outlays. Create a separate line item for every significant cost.
Cash forecasting should be a simple activity incorporated into the monthly activities of a business and there are various tools that can assist.
2. Forgetting to focus on the money flowing in
Money in accounts receivable can be a sign of payments to come, but the money still needs to be collected. You can't spend accounts receivable yet, so don't treat them as profit.
Create (and follow) a process to keep on top of incoming payments:
- Issue invoices promptly
- Implement credit checks on all new non-cash customers
- Collect a deposit at the point of the initial order
- Move to payment in advance, or even cash-on-delivery, if possible
- Track slow-paying customers and don't delay about contacting them
Monitor 'Collection days' (how long you wait to get paid); 'Inventory turnover' (how long inventory sits on your shelf); and 'Payment days' (how long you wait to pay your suppliers). Negotiate faster payment terms with your clients and slower terms with your suppliers.
Be proactive about collecting late payments. Ensure the contract you have with your clients makes clear what happens when payments are delayed, such as applying a late-payment penalty or stopping work.
Cashflow advice is one of the things you get in your AkoniHub personalised report.
3. Not being realistic
The only constant is change. So don't assume that receivables will always continue to come in at the same rate. Also, interest rates fluctuate, and payables may not be extended as far as they have been in the past.
It’s impossible to predict the future, so the best thing to do is to prepare for the worst, while hoping and working for the best.
If you find yourself heading for a sticky cashflow situation:
- Apply for working capital before you run out of money (banks are happier to offer a loan before you need it)
- Ask your suppliers for extended payment terms (they have a vested interest in your success)
It's easy to find the business bank accounts with the best interest rate when you join AkoniHub.
4. Growing too fast
Remember, turnover isn't profit, and profit isn't cash. Your company will only survive if you generate more cash than you spend. If your outgoing expenses exceed your incoming cash, you have a cashflow problem.
The answer isn't just selling more stuff, more quickly – because the faster you grow, the more financing you need. You will always need cash to use as working capital.
Don't take an increase in orders as a sign to increase spending. Don't build up inventory that you hold in stock for ages. Continue to be 'lean' and operate on minimal expenditure as you grow.
Plan ahead and secure appropriate financing to ensure you have sufficient working capital for peak times.
Retailers have to do major purchasing in the run up to busy seasons such as Christmas, but not all patterns are so predictable. If you're experiencing or facing a growth spurt, remember that production costs increase at the same rate as sales. To avoid increased returns or loss of loyal customers, ensure your customer service is scaleable to cope with increased demand.
Following these tips will keep investors happy, allow you to make strategic choices, and provide you with a financial cushion in case you need it.
Akoni helps businesses make the most of their cash. Register for free at AkoniHub.com