Maintaining a healthy, positive business cash flow is critical for long-term success. Still, it’s not unusual for business owners focused on growth to make mistakes managing their money. Not only have 64% of Canadian small businesses had cash flow issues, research suggests that 82% of businesses fail due to cash flow mismanagement.
Most cash-related disasters are the result of poor planning. By learning to recognize these 7 major cash flow mistakes, you can take steps to avoid them long before they necessitate closing your business.
1. Not having a revenue plan
Building a reliable revenue stream takes a certain amount of advance preparation—and it’s one of the main reasons why savvy entrepreneurs take time to create a business plan in the first place. Not only can working out how you’re going to generate a profit provide you with a built-in revenue roadmap, it helps to ensure you’ll have income flowing in sooner and more consistently.
2. Over-investing in assets
Too many business owners make the mistake of investing too heavily in inventory, machinery, and other assets before they can really afford to. While you may need specialized goods or certain equipment to get up and running, it’s best to make those purchases part of a deliberate plan and stick to the timing you’ve devised for any capital expenditures.
3. Failing to prepare for unexpected costs
From new competitors and supply chain disruptions, to economic downturns, every business owner can expect to run into expenses they hadn’t planned around. You may not be able to predict what form uncontrollable cash flow problems will take, but you can stay better prepared for them by keeping your business strategy flexible and building up a cash cushion.
4. Not setting aside cash reserves
It can be hard to resist reinvesting your profits when business is booming. But setting aside some cash savings as well—by making regular contributions to an emergency fund in a separate bank account, for example—is often critical for riding out the temporary cash flow crunches related to unexpected costs or customer payment delays.
5. Putting growth before budget
It’s not uncommon for entrepreneurs to put out more cash than they’re taking in once they get caught in the momentum of a business growth cycle. Your venture may be able to survive a massive cash outflow for a short period of time. But spreading yourself too thin, for too long, budget-wise can send your business into an irreversible cash flow tailspin.
6. Neglecting to track your accounts
With 98% of owners agreeing they’d rather focus on business growth than tasks like bookkeeping, cash tracking often falls to the bottom of their priority pile. The less knowledgeable you are about the timing and amount of money flowing in and out of your accounts, however, the more likely you are to run into trouble paying bills on time or funding new business requirements.
7. Misinterpreting your business needs
To succeed as a small business owner, it’s important to consistently think and act from a cash flow perspective. Tracking your accounts is a good place to start—but dedicated bookkeeping habits will only take you so far if you don’t also apply your financial data to evaluating your business needs and purchase decisions in a timely and realistic way.
Remember: By doing your best to avoid the 7 major cash flow mistakes described here, you’ll be in a better position to preserve working capital, prevent your company becoming cash-poor, and avoid falling into a vicious cycle of credit and debt to keep your business afloat.