Even when your business is profitable, it does not guarantee a steady cash flow. Seasoned business owners can still run into financial difficulties because of the inability to handle cash flow. Cash flow missteps can affect your company’s reputation. If an important opportunity comes your way, it will be challenging for you to move forward due the lack of cash.
Mistake #1: Not having a cash cushion
Even when your business is thriving, there are still unexpected expenses that you need to manage. This is where a cash reserve becomes necessary as it allows you to ride out sales slowdowns. The amount of cash you should have in reserve will depend on your seasonality and industry. The rule of thumb is that you should have at least three to six months of savings to cover expenses in the event you run into cash crunch. If you decide to apply for a credit line, make sure it takes place before you need it. This means a line of credit must be present when your cash flow is strong.
Mistake #2: Allowing invoicing to take a backseat
The reason regular invoicing is essential is because your monthly bills never take a break. Even when you are short of cash, payroll, utilities, rent and other expenses should be paid. That said, your invoicing should continue to keep pace so you do not end up chasing unpaid invoices. Be sure you do not overlook invoicing so you can keep cash flowing through your business. Make it a habit to invoice promptly because a slight delay can either result in holding up payment or missing a customer’s payment cycle.
Mistake #3:Ignoring late payments
Sure you have a steady flow of cash, but even a successful business can face financial problems if your clients always miss making a timely payment. As much as possible, accept multiple forms of payment such as check, cash, credit or debit card. This way, clients can make a payment using their preferred payment method. You can also encourage early payment by offering a small discount to prompt payers.
Mistake #4: A lack of cash flow forecast
Since cash crunches are inevitable, it is essential to devise a strategy so you keep your business on its feet even in times of financial difficulties. Your business may be profitable, but this is not enough to be complacent. An effective forecast should involve estimating the revenue you are bringing into your business on a weekly or monthly basis. You should also take factors such as economical conditions, marketing efforts and sales cycles into consideration. You should also be aware when you should expect to receive payments.