Cash flow is no laughing matter. When you’re running your small business it might be tempting to ignore a lack of available funds, assuming the money will come soon, but this can be a fatal mistake. Of all small businesses that fail, 82% report that cash flow issues were a reason for going under, with 29% running out of cash altogether.
Avoiding this is one of the key aspects of starting up a company, and the first few years are especially crucial. This will be a period when you’ll probably be technically making a profit, but not necessarily having the money on hand. So how can you steer clear of cash flow problems? Here are three of the most common mistakes that you need to avoid at all costs.
1. Not accounting for growth
Entrepreneur and angel investor Tim Berry is well aware of the cash flow problems that growth can bring. In an Entrepreneur.com post, he wrote of a time when his business was growing quickly and sales had doubled. Surprisingly, this was also the time his company nearly went under due to a lack of cash.
The problem is that as sales double, costs increase as well. This is fine as long as you get paid on time, but that’s a rarity in business, with invoices often being months overdue. Growth is still something to aim for, but you need to remember that you’ll likely be cash-poor at first, and without planning for this your business will be at risk.
2. Not accounting for every expense
It might seem like ‘keep track of your outgoings’ is really obvious advice, but it bears repeating. Time and time again, small businesses get into cash flow trouble because of unforeseen expenses. A Smallbusiness.co.uk profile of several companies showed this, with accounts of costs like tax bills being missed and adding up to huge payments.
In addition to accounting for all your present costs, you need to plan for the future. What expenses are going to come up in three, six or twelve months’ time? Accurate forecasting can save your business significant sums. One study of consumer products companies found reducing over-forecasting by just 1% resulted in an average gain of $1.43 million, while the same improvement in under-forecasting led to average gains of $3.52 million.
3. Keep a solid cash reserve
You always want to make sure you have cash put aside in case you run into financial trouble down the line. If you invest everything into the business and don’t have a reserve, you’ll find yourself in serious trouble if you have a month or two where clients fail to pay their invoices, for example.
Opinions differ on how much money to keep back. Some recommend a reserve equivalent to two months of your operating expenses, while others believe three to six months is a better figure to aim for. However, you need to consider factors such as how seasonal your business is, and how well you’ll be able to scale back if you need to cut costs.