Many small business owners worry about cash flow. Without money on hand, it’s difficult to pay staff, bills and taxes.
Improving cash flow can be a challenge, but doing so will help put your business on a much stronger footing in the long term.
Coco Hou, managing director of Platinum Accounting, says she sees small businesses make many common errors when managing cash flow.
“Spending the money before receiving the revenue is a common one. Remember, issuing an invoice doesn’t mean the money has been collected. Being cautious with spending is one of the most essential disciplines to develop in business,” says Hou.
Poorly-defined payment terms and not monitoring accounts receivable, leading to uncollected revenue, are also mistakes small businesses can make, she adds.
Says Hou: “also try to avoid impulse spending on assets. Don’t spend the money just because you want to take advantage of the instant asset write-off policy.”
Under this policy, businesses are able to claim an immediate tax deduction for each asset costing up to $150,000.
Read on for five hidden cash flow leaks you should look out for to give your business valuable financial breathing space.
Leak 1: Slow Collection on Invoices
It can feel like the job is done after you make a big sale. But it’s not time to celebrate just yet. You also need to make sure your clients pay you in a timely fashion. This is because you can end up with a cash flow shortage if your accounts receivables start to build up because clients take too long to pay, even if your business is highly profitable on paper.
Start by negotiating terms with your clients so the payment deadline is as short as possible. Every industry is different, but if you are able to offer terms of seven days, you will be able to bring cash into the business quickly. Also ask for a partial deposit upfront to immediately generate some cash. Make contact as soon as a client is late paying your invoice. It’s a good idea to use invoice management software to automate the process for you.
Leak 2: Covering Accounts Payable Too Quickly
As you speed up processing accounts receivable, consider the opposite strategy for your accounts payable. Instead of paying an invoice as soon as it arrives, read through the terms to see how long you can wait to pay it. Simply waiting to pay a bill until its due date can prevent a cash shortage.
Also, never be afraid to negotiate. Contact suppliers to see if they will extend your payment terms. Another idea is to ask for a discount if you pay early. That way, you boost your profit margins when cash is plentiful, while buying more time when it isn’t.
Leak 3: Too Many Unnecessary Expenses
Business expenses can sneak up on you: extra office space you don’t use, unsold inventory, costly phone plans are just a few. Each purchase might be a small amount, but combined they can turn into a serious drain on your cash flow.
Dedicate time to business expense management and cut out unnecessary spending to help plug cash leaks.
Leak 4: Not Studying Cash Flow Patterns
Cash flow tends to fluctuate throughout the year. Some months, you have more money but it may get tight in others. These swings don’t have to catch you off-guard because chances are there’s a pattern. If you perform a cash flow analysis, where you study your business history to identify trends, you can spot cash flow swings ahead of time and prepare for them.
Leak 5: Failing to Have a Backup Plan
While performing a cash flow analysis can help you figure out how to plan ahead, the business world is still unpredictable. It’s possible that despite your best efforts, you run into a cash flow shortage. Knowing that this can happen, consider setting up a backup plan for financial emergencies ahead of time.
As this shows, there are lots of ways to manage cash flow. But it’s important to be vigilant and consistent. That’s the best way to ensure you always have enough money to meet your obligations.