Helping other people with their record keeping has taught me one thing – people are making some serious mistakes when it comes to managing their cash flow. And with technology constantly changing, the mistakes are evolving.
No matter how large or small the company, the mistakes are always the same. And with cash flow being the life blood of a business, you have to stay on top of things if you want your business to survive.
As I have mentioned before, cash flow management is essential because it helps you:
- Identify cash shortfalls
- Provide a glimpse into your customer’s financial situation
- Track towards your goals
And that’s why it’s so important to do everything you can to avoid these 6 critical cash flow mistake’s. Otherwise you will be just throwing you money away.
Mistake #1 – Uncontrolled spending
I cannot stress it enough – those debit and credit cards that are linked to your business account are nothing but the devil. No seriously having those cards makes your life easier when you are making actual legitimate business purchases. But when you forget that those are business funds and use them it for everything from groceries to family vacations, your bank account slowly disappears and your left trying to figure out how you are going to pay your business expenses.
Mistake #2 – Not enforcing a collections policy
Now I’m not saying you have to act like a debt collection agency, but you need to have some rules in place for collecting payments that aren’t received on time. Don’t be afraid to call these customers up and ask for your payment if they are more than 30 days behind. You have earned to the right to receive that payment. It’s up to you whether you collect it or not.
Mistake #3 – Jumping the gun on making payments
Your anxious to pay your vendors on time or a vendor just showed up at your door. You don’t want any issues because you may need their services again. Susie told you that you should have the payment today for the services you provided to her so you go ahead and write the check for those vendor bills. You never receive Susie’s payment. Heard this story before? Happens all the time. Don’t be so anxious to pay bills that you make payments before you receive funds from the customer. This is a recipe for disaster because 9 out of 10 times, you will not get that deposit you were expecting. It just doesn’t happen that way. Paying bills prematurely puts you at risk for bounced payments and negative cash flow.
Mistake #4 – Constant increased payroll
Some industries go through periods when they have more employees on staff than during other parts of the year. The thinking is usually that the increased workload will compensate for the increased labor costs. This is not always the case. Spending money and time on unqualified staff in hopes of training them appropriately ends up costing you more than hiring qualified staff from the start.
Mistake #5 – Not knowing your breakeven point
Your breakeven point is the point at which you profits equal your costs. Anything beyond that is pure profit, theoretically (see mistake #6). This figure is more often in the form of dollar amount or revenue that needs to be generated per month. But it can be broken further down into number of clients. Knowing this number will tell you how much business you need to bring in to keep your business afloat, including your owner salary.
Mistake #6 – Poor Project Planning
Poor project planning results in increased costs which in turn creates a decreased profit. Poor project planning leads to errors and mistakes that your business will have to foot the bill for later. When this occurs more often than not, knowing your breakeven point doesn’t matter. The profit that was anticipated will be eaten up by these unexpected costs.
What lessons have you learned from making poor cash flow decisions?
All rights reserved. © 2013