Business finances are complicated, no doubt about it. As fantastic as it feels to make an enormous sale (and it does!), that's only one part of the convoluted equation that accounts for the ways in which money moves through your company. Sales matter. Revenue matters. Expenses matter. Here's the irritating thing, though: You can have fantastic sales numbers, a great influx of revenue, control your expenses and still have problems managing cash flow.
In fact, in my mind, cash flow may be the single most important factor to manage when you're looking at day-to-day operations. Cash flow keeps the lights on and keeps employees coming in to work.
Managing cash flow for your company isn't exactly intuitive, though. Let's take a look at common cash flow mistakes and how you may be able to remedy them.
1. Spending too much on sales.
Of course, you have to spend money to make money.
But I've seen countless entrepreneurs who pour a fortune into attracting the tip-top talent for their sales team, who dump mountains of money into marketing and who spend lavishly to entertain their big fish.
Hiring outstanding sales staff is great. Marketing is important. Client satisfaction matters. But here's the problem: If you don't evaluate the return on your investment, you won't know if your sales expenses are really worth it.
Potential Fix: Make sure you're getting your money's worth for your sales expenses by getting granular in your analysis. Consider examining spending on a client-by-client basis, since some customers cost more than others. Don't just blow money without calculating your return.
2. Going with the seasonal flow.
While some industries simply chug along, steady-as-you-please, others experience significant seasonal fluctuations.
Whether you're a retail store with holiday spikes or an accountant with tax season increases, try not to let seasons dictate your cash flow. Why? Because despite our best intentions, it's hard to bank cash from the boom times so you're not destitute during the lean times.
Potential Fix: You can be creative and try to find ways to generate business during the slow periods so you can even out your cash flow.
Whether you partner up with a business in another industry for mutual benefit or you offer promotional pricing for off-season business, boosting your revenue when business is slow can help with your cash flow.
3. Relying on outdated billing models.
Lots of companies used to send out invoices on the first of the month. It's nice and clean, and all the billing is handled.
But a drawback of that practice is that you may have lean times right before your big influx of cash. Companies frequently default to 30-day terms without bothering to consider whether there's a better way. Waiting for your customers to pay your invoice means you may have to wait to pay yours. And that can spell trouble for managing cash flow.
Potential Fix: Consider reimagining your company's billing. With the software we have now, there's no reason on earth why all your invoices should go out at the same time.
I'm a fan of billing on the spot, but you can also stagger invoices to go out throughout the month, distributing the cash evenly.
Also, consider using shorter payment terms. You could—with notifications to clients, of course—make your invoices due upon receipt. Why wait longer than you have to for your money?
4. Failing to have emergency reserves.
Things happens. You lose your biggest client. Your best sales person abandons ship. Critical equipment unexpectedly needs extensive repair or replacement.
Rainy days are inevitable, and far too few companies are prepared for them. If you suddenly had to come up with, say, $10Gs, would you have it?
We know we should be saving money personally, but we also need business savings if we don't want our cash flow to dry up.
Potential Fix: Consider socking some money away! Sure, it's hard—especially if you're working to scale your company up. But if you genuinely can't set cash aside, then you may want to at least explore some borrowing options in case you have an emergency. Knowing what your short-term loan options are can help speed up the process of getting critical funds and help in managing cash flow.
Sustainable growth—whether you're talking about crops or companies—means not outstripping your resources.
By carefully managing cash flow and avoiding common cash flow mistakes, you can help your company meet its obligations and continue your growth.
Read more articles on cash flow.