Most of us don't become entrepreneurs because we have a burning desire to learn about accounting. We're great at what we do and want to make a contribution to our chosen industry, so we start a company. But running a business requires a working knowledge of finances. You might never care enough to take a deep dive into absorption costing or leveraged leases, but at the very least you must know something about cash-flow management.
Your business requires cash, and sometimes the best strategies for handling it aren't always intuitive. In fact, there are common cash-flow management mistakes business owners make.
Cash keeps your company alive, and you must keep it flowing in and out at the right rate.
The good news? There are ways you can avoid them.
1. Failing to keep a cash reserve.
If there's one lesson both business and life have taught me, it's that the unexpected will happen.
Your company's rolling right along, sales are good. You're thinking about how you might grow or expand, and BOOM! Your best salesperson goes to work for a competitor or your biggest supplier doubles prices or your delivery van needs a new transmission.
If I could only teach one cash-flow management lesson, it would be to keep a cash reserve. When something goes wrong, your cash reserve can help keep you in business. You can build your reserve slowly if you need to, but do it, starting today.
2. Confusing revenue with profit.
It's not at all uncommon for a business owner to feel like they're running a successful company. You might have tons of revenue coming in, lots of new clients and a great reputation in your industry.
But revenue is only part of the profitability equation.
Having expenses that match (or even exceed) your revenue means you're not making any money. When you're selling $1 million of product a year and spending the same, it's a wash.
If your cash-flow management strategy doesn't include setting aside some of your revenue as profit, then what's the point?
3. Borrowing money.
It's a mistake I've seen over and over. An entrepreneur has a shortage of cash and borrows money to cover bills.
The reasoning is always the same: "It's just until this big client pays an invoice" or "just until my Q4 sales pick up."
The problem is the business has cash-flow problems. Expenses are too high and/or prices are too low, and having to pay back a loan isn't solving that problem. It's a band-aid, not a cure.
When your cash-flow management lets you down and you have a temporary shortfall, I think borrowing money should be the very last resort. Try running a promotion to generate sales or cutting back on unnecessary expenses instead of borrowing money.
4. Letting your receivables slide.
The whole point of being in business is collecting money from your customers. If your business model involves invoicing for services and waiting until a customer finally decides to pay it, you should consider being more vigilant.
Also, you don't have to offer 30-day or 60-day terms, you know. You can make your terms whatever works for your cash-flow management needs.
Whether you offer a discount for immediate payment or payment in cash, tweaking the ways in which you handle receivables can get revenue flowing into your company much quicker, which can help end your cash crunch.
5. Charging too little for your services.
Everyone's looking to save a buck, even your customers. But if you're charging too little for your product or service, your company simply won't be sustainable.
All those expenses—the bills you have to pay each month—those should be more than covered by your revenue. If they're not, you may want to consider raising your prices.
Raising prices can be scary, and you might actually lose some customers. The secret? The customers you lose probably weren't your best customers. Your best customers are the ones who believe in the value of your service. They're willing to spend a little more because they're invested in your success.
When you offer premium service, you can charge premium prices. Cash-flow management becomes much easier when you have more cash coming in.
Cash-flow management isn't exactly a sexy part of running your own business. It can be time consuming. It can be tedious to look at every expense and every revenue source. But it's vital. Cash keeps your company alive, and you must keep it flowing in and out at the right rate.
Read more articles on managing money.