Cash flow boo-boos

"Whoever is faithful with little, will be given much" Luke 16:10a

Cash flow is critical to a business’s survival and growth, but many business owners make common mistakes that can lead to cash flow problems. Here are some of the most frequent cash flow mistakes I see in the fractional CFO practice:

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??? ?1. ????Overestimating Revenue???

?? Many business owners are overly optimistic about future sales, leading to inflated revenue projections. This can result in overspending based on expected income that doesn’t materialize. When setting revenue targets, I caution them, "top-line is vanity; bottom-line is sanity".

??? ?2. ????Underestimating Expenses???

?? Failing to account for all expenses or underestimating costs can lead to cash shortfalls. Commonly overlooked expenses include taxes, maintenance, and unexpected costs.

Solution:?regularly review and update your expense forecasts, including a buffer for unexpected costs. A monthly meeting with the bookkeeper and reviewing ALL expenses will go a long way to being aware of expenses and how they flow.

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??? ?3. ????Slow Invoicing???

?? Delayed invoicing can significantly impact cash flow, as the longer it takes to send an invoice, the longer it takes to get paid. This is a particularly thorny issue with service providers that bill by the hour. They are busy and don't make time for billing. Then they wonder why there is no money in the account!

?? Solution:??Implement a prompt invoicing process and consider using automated invoicing software to ensure consistency.

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??? ?4. ????Poor Receivables Management???

?? Allowing clients to delay payments or failing to follow up on overdue invoices can cause a cash flow crunch. Reviewing Accounts Receivable and their aging is a real eye-opener to clients. Most do not realize how much money has not been collected.

?? Solution:??? ?Set clear payment terms, follow up on overdue payments promptly, and consider offering early payment discounts or using invoice factoring.

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??? ?5. ????No Cash Flow Forecasting???

?? Operating without a cash flow forecast means you’re not proactively managing your cash position, leading to surprises when cash runs low. The cash flow forecast is THE most asked-for service request I receive from business owners, and for good reason. It is as close to a crystal ball as you can get!

?? Solution:??? ?Create and regularly update a cash flow forecast to anticipate and prepare for future cash needs.

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??? ?6. ????Overextending Credit to Customers???

?? Being too lenient with credit terms or extending credit to clients with poor payment histories can tie up cash in unpaid invoices. Service providers often extend generous payment plans to clients just to close the sale. They do not check the customer's credit history before doing so and are often surprised when their bill goes unpaid.

?? Solution:??? ?Tighten credit policies, conduct credit checks on new clients, and consider requiring deposits or partial payments upfront. Ask for a screenshot of a customer's FICO score before extending payment terms!

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??? ?7. ????Ignoring Seasonal Variations???

?? Some businesses experience significant seasonal fluctuations in cash flow. Failing to plan for these can lead to shortages during slow periods.

?? Solution:??? ?Analyze historical data to identify seasonal trends and adjust your cash flow management accordingly, such as building up reserves during peak seasons in a "drip" account.

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??? ?8. ????Over-investing in Inventory???

?? Holding too much inventory ties up cash that could be used elsewhere in the business, leading to liquidity issues.

?? Solution:??? ?Implement inventory management practices to optimize stock levels, such as just-in-time (JIT) inventory. This is often a challenge because vendors offer better discounts the more you buy from them. This discount has to be measured against the price the business pays for having to borrow cash to make ends meet. A little less discount but more money in the bank may be a wise decision.

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??? ?9. ????Not Managing Overhead Costs???

?? Failing to keep overhead costs in check can erode profits and strain cash flow. This includes expenses like rent, utilities, and administrative costs. Software apps are often overlooked as a cost item. Sometimes, the software is no longer used but has not been canceled.

?? Solution:??? ?Regularly review and renegotiate overhead costs, and look for opportunities to reduce or eliminate unnecessary expenses.

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??? ?10. ????Relying Too Much on Debt???

?? While borrowing can help manage short-term cash flow issues, over-reliance on debt can lead to high-interest costs and debt servicing burdens.

?? Solution:??? ?Use debt strategically and focus on improving cash flow from operations to reduce reliance on borrowed funds.

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??? ?11. ????Lack of Emergency Fund???

?? Operating without a cash reserve leaves a business vulnerable to unexpected cash flow disruptions, such as an economic downturn or a large, unexpected expense.

?? Solution:??? ?Build and maintain a cash reserve that can cover at least three to six months of operating expenses.

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??? ?12. ????Neglecting Tax Obligations???

?? ?Failing to set aside funds for taxes can lead to large, unexpected tax bills that strain cash flow.

?? Solution:??? ?Set aside a portion of your revenue each month specifically for tax payments, and consult with a tax advisor to stay on top of your tax obligations. I always recommend a separate bank account at a different bank to avoid temptation.

13. Starving the Business and Feeding the Owner

Sadly, I see owners who use the business as personal ATM and withdraw every bit of cash from it they can.

Solution: Pay yourself a reasonable, sustainable salary and learn to live on that until the end of the year and the tax return has been prepared and you can see a safe amount to take as a bonus.

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My name is Diana Miret.? As a Christian fractional CFO, I provide financial counsel to businesses earning between $1M and $10M to increase profitability, optimize cash flow management and heighten financial confidence and clarity. You can find me at www.dianamiret.com