Cash flow is the lifeblood of any business, but many people overlook its importance to the detriment of their enterprise.
Here we share the 5 most common mistakes made by business owners, and how to avoid them.
1. You don’t have a cash flow plan
Cash flow is the lifeblood of any business,
yet very few business owners have a cash flow plan. There are many reasons people don’t do this including:
- the cost to have their accountant do this, is perceived as greater than the benefits of doing it.
- lack of knowledge to prepare one
- lack of knowledge of what a cash flow is, let alone know how to prepare one
- too proud to ask for help, or fearful of others finding out that they don’t have it all together
- too busy operating the business to make time to do one
2. Debtor management issues – customers owe you too much money
To some degree, this is a problem in most businesses.
Some reasons that this problem occurs are:
- Payment terms are not communicated, or not enforced. If customers don’t know when a payment is due, many will take advantage. Some will take advantage until reminded.
- Bad paying customers – some people and businesses are just bad payers.
- Slow invoicing – many small businesses don’t commit enough time to administration, which can result in customers not being invoiced until some time after services or goods are provided. The longer you wait to invoice, the longer it will be before you are paid.
3. Tax and GST payments
Tax and GST are not well understood by many, and owners often rely on their accountants to advise them of the amounts due and when. Despite the best intentions, with ups and downs in the business performance and the occasional breakdown in communication, there are sometimes still surprises that cause cash flow problems.
Many people have a very negative perspective on paying taxes. If this sounds familiar, you may want to take a look consider your ideas about tax and decide whether they are helpful to you or not.
Logically, you want to be paying both GST and tax – if you are not, you are either cheating the system, or making a loss. Neither of these options are good for business in the long term. Although short term losses are sometimes reasonable, long term losses can really hinder your progress.
4. Unnecessary or excessive personal spending from the business
This can often happen because of lack of planning. We have all been there – just because there is cash in the business account, doesn’t mean it’s an extra that is available to the owner.
Suppliers are paid from cash flow in, as is Tax and GST and it pays to be aware of how much is due and when to avoid surprises.
5. Insufficient working capital
Cash, more often than not, needs to be spent before income comes in. Staff need paying, plant and equipment needs to be purchased and repaired, stock needs to be purchased before it is sold, etc. None of these things are a problem in and of themselves, but if there are insufficient funds to pay for these things, it can be detrimental.
So now you know where you might be going wrong, where to from here?
Our Number 1 Strategy for getting back on track will help:
Prepare and monitor a Cash Flow Budget.
A cash flow is a report that shows the money expected to come into the business, and the cash that will flow out of the business.
Here are some suggested guidelines for preparing your cash flow;
- Make it sufficiently detailed – too much detail can be confusing and distracting. Insufficient detail will increase the chances of unexpected results and Cash Flow problems
- Include “Below the Line” items – ‘below the line’ is an accounting term for items that are not profit and loss related and include; GST, tax, loan repayments, shareholder drawings, etc.
- Use Monthly figures – your annual budget should include monthly figures because some items are regular and some irregular. Annual planning is too long and will make it difficult to review and make any changes quickly.
- Appropriate accounting system – you want a system that will allow you to update your actual figures monthly, and still have the forecasted / budgeted figures for the rest of the year. This will allow you to have an updated, expected cash balance at the end of your financial year to help you with planning & decision making.
One of the major benefits of planning the numbers, is the insight and learning gained by going through the Cash Flow planning process, and the effect that this in turn has on your business.
Make your annual (by month) summary Cash Flow fit on one page – it keeps things as simple and concise as possible!
Bonus strategy for debtors:
- Prompt, follow up and reminders – you need to remind customers in a timely manner when they have not paid their bills within the agreed timeframe.
- Follow-up process / procedure (respect your clients) – it is fantastic to have a process in place for pursuing overdue fees because this helps you to resolve the issue more professionally. Remember, the people who owe you money are your clients. You want them to use you again, and you want them to refer your business. You provided the goods or services, so you need to collect the money that is due to you. But in doing this, don’t forget that you want to maintain a relationship. “Do unto others” is a good rule to remember – people have valid reasons sometimes and you might be the one wanting grace some day.
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