Avoiding the Most Common Cash Flow Pitfalls

Cash flow is one aspect of your business that you really need to keep a handle on in order to avoid serious consequences. But what is it exactly that can get us into so much trouble?

In this post, we’ll look at some of the most common cash flow errors small business owners make and how you can avoid them.

Don’t Underestimate Start-up Costs

If you’re still starting out, you need to make sure you have a realistic budget detailing exactly how much it’s going to cost to run your business. If your estimates are off and you don’t have a cash reserve, you might find that you have cash flow problems from the start. Create a spreadsheet or use a budgeting program to figure out every last detail.

Collect on Time

We touched on accounts receivable briefly last week when discussing the importance of making sure invoices are paid, but it bears repeating because it’s one of the biggest cash flow pitfalls small business owners face. Not collecting on time can keep your business from growing, but more importantly, it can make it hard for you to pay your own bills on time. So make sure you set clear time limits for when invoices are paid.

Watch the Profits

Profits constitute a common problem area for small business cash flow. One issue involves the age-old mistake of counting one’s chickens before they hatch. You might think you know what your profits will look like, and you might be absolutely correct. However, profits aren’t a quick fix; in general, most businesses take at least a year to reach profitability, which means you need to really make sure you have cash flow reserves for that initial period.

Another profit-related issue involves not having high enough profit margins. Your business spends money to make money, and you need to create a wide enough margin to make that profit. Otherwise, you’ll just be sinking most of that money back into the business.

Don’t Grow too Quickly

Finally, rapid growth can create big cash flow problems for a small business. While growth is what you’re ultimately aiming for, moving too quickly can drain your reserves and send you into a negative cash flow situation if you find yourself needing to use credit to pay for new employees or equipment. While setting up a line of credit is a good backup solution, the best tactic is to be conservative about growth during your start-up period.

If you’re looking to avoid these cash flow pitfalls, remember that a professional can help! I’d love to talk with you about your small business and make sure it’s heading in the right financial direction. Simply contact me for a consultation.