At its most basic definition, a cash flow management system shows you how much money your business has coming in and going out. It can be used as a barometer for your overall financial health. But there are also some common mistakes people make when they prepare their cash flow statements. These can seriously affect your bottom line and your ability to grow.
When you're not looking out for hidden financial dangers, these surprises can spring up without warning.
1. High Profit but Low on Cash
The key difference between profit and cash is that profit is not cash. Profit is the gain in value that a business makes from its operations, while cash simply refers to money in hand or on hand at any given time. In other words, if you have $10 million in profits but only $1 million in your bank account, then you are operating at a loss-your business has been hemorrhaging money for months (or years). A business with high profits but low cash can be hiding something big behind those numbers; it may just need some extra planning and management tools before it starts creating wealth for its owners again.
2. Failure to Forecast Cash Flow Statement
The cash flow statement is the lifeblood of a business. It tells you how much money your company makes, and what it spends on things like rent, payroll, and purchases. You need to use them as an indicator for future performance so that when there is trouble on deck, like low cash flow coming out from under whatever poor situation caused it (known colloquially around these parts simply enough), then we can act quickly before things get worse instead waiting until after our backs have been against the wall.
The cash flow forecast should give you a birdseye view of how much money will be coming in each month of the year 9 months to 12 months in advance. This helps you plan ahead and allocate resources properly.
3. Inflation Attack
Inflation is a general increase in the prices of goods and services. It can be caused by a number of factors, including supply and demand, availability of money, and foreign exchange rates.
Inflation is bad for business because it reduces the purchasing power of money - which means that you need more units to buy fewer things with them over time. This means you'll have less revenue from selling your products or services compared with what they would have been worth before inflation occurred! The best way to deal with this problem is through diversification: You should invest some portion (but not all) of your investment portfolio into assets that don't tend towards inflation like gold bullion coins or real estate property ownership (especially if you are involved in any sort/level of real estate development).
4. Sales Tax and Income Tax Recovery
As a business owner, you might be wondering how to recover both sales tax and income tax. The best approach is to deposit tax amounts received from customers into a separate bank account and pay them on the due date to government authorities. In such cases, your sales taxes can be recovered through refund claims with sales tax authorities since you have already paid them out of pocket by deducting them from total revenues before deducting expenses such as salaries or rents.
5. Slow-paying Customers
Any business owner knows that cash is king and is essential to keeping the lights on and the doors open. Slow-paying customers can quickly put a strain on limited resources, making it difficult to meet payroll or purchase inventory. In some cases, businesses are forced to take out loans or dip into savings just to make ends meet. Of course, slow payments are not always intentional - customers may simply be facing their own financial difficulties. However, the impact on businesses can be significant. To avoid cash flow problems, many businesses require customers to prepay for goods or services. This up-front payment ensures that businesses have the resources they need to meet their obligations. Other businesses may offer discounts for early payment, providing an incentive for customers to pay their invoices promptly. By taking steps to improve cash flow, businesses can protect themselves from the financial challenges posed by slow-paying customers.
6. Seasonal Work
Seasonal work can be a major problem for businesses. Some businesses are seasonal, and some aren't. If you fall into the latter category, then you should be prepared to handle slow periods when your customers are not as active.
Seasonal work is a big issue in many industries: agriculture, construction, and manufacturing all have their own cycles of activity that impact cash flow. The best way to deal with this problem is to plan ahead so that you know what your income will look like during those times when sales may be low or nonexistent (or both).
7. Bad debt
Bad debt is one of the most common problems that can derail a business. It's not just an issue for small businesses and start-ups, but also for established companies who are hit hard by unexpected expenses or sudden changes in their industry.
The best way to avoid bad debt is to keep your cash flow healthy so you're not forced into taking on too much credit or loans. This means having enough income coming in each month and not spending more than your business makes (this is called living within your means). If this sounds challenging, there are ways you can make sure everything stays on track.
8. Selling too much on credit
Selling on credit is a great way to build a relationship with your customer, but it's important to be careful about how much you sell on credit. If you sell too much on credit, it's possible that you could get into trouble with the IRS or creditors. You'll need to track how much has been sold on credit so that when filing an income tax return, all of the money can be allocated correctly.
When selling on credit, try limiting yourself to 20% of your profit margin as an upper limit (or whatever percentage works best for your business).
9. Inaccurate Budget Forecasting
The most common mistake made by small business owners is undershooting their expenses. This happens when they underestimate how much their business will cost and end up spending more than they anticipated.
The second most common mistake is over-estimating income. Businesses that have unrealistic expectations about revenue can also be considered under-budgeting because they're not taking into account all possible sources of revenue (or any source at all).
10. Big Projects
Big projects are risky. If you're looking to take on a big project, but don't have the cash, it's best to pass. You can always go back later and ask for more money if your business needs it.
If you do have the cash, but still want to take on a big project, here are some things that will help make sure your business survives:
- Make sure there is no existing work involved in the project - maybe even hire someone else who already has experience with this type of thing (and who doesn't cost too much). This way, if everything goes south halfway through the job and requires expensive repairs or replacement parts/services from outside vendors because of damage caused by improper installation or poor maintenance practices over time... well then maybe we'll just wait until next week! 🙂
Conclusion
It is important to understand the cash flow surprises that kill your business. By identifying these problems early on, you can take actions to fix them before they become serious problems for your company.
Author - Sean FosterI help business owners and professionals to grow their businesses, improve their bottom line profitability, and allow them to regain that often missing component, their work-life balance. He is both an entrepreneur and business owner myself that have years of real-world experience and service clients throughout New Zealand. https://www.seanfoster.co.nz/.
