Cash flow is the lifeblood of any business! This is arguably even more noted for small businesses. While many entrepreneurs focus on profits, it’s often poor cash flow management that leads to financial trouble or even business failure. Understanding and avoiding common pitfalls can help small business owners build more resilient and successful operations.

We tend to see the following common cash flow mistakes and here we share our thoughts on how to avoid them.

1. Confusing Profit with Cash Flow

Many business owners equate profitability with financial health. However, a company can show a profit on paper while still struggling to pay its bills. This disconnect often arises from revenue being recorded before cash is received. To avoid this, regularly review your cash flow statement, not just the income statement, and always track actual money in and out.

2. Poor Invoicing Practices

Delayed or inconsistent invoicing can stifle cash flow. If clients aren’t billed promptly, payments are delayed. To prevent this, automate invoicing processes as best you can and establish clear payment terms, sending reminders before and after due dates.

3. Failing to Follow-up on Late Payments

Letting overdue payments linger without follow-up is a cash flow killer. Many small business owners feel awkward chasing clients, but it’s essential. Set a firm collections policy and follow up quickly when payments are late. Consider offering early payment incentives or even charging penalties for late payments when appropriate.

4. Overestimating Future Revenue

It’s easy to assume that a big sale or contract will come through, but basing spending decisions on expected income that hasn’t yet materialised is a risk. Adopt conservative revenue projections and avoid spending based on optimistic assumptions.

5. Overspending During Growth

Rapid expansion often leads to increased costs – more inventory, staff, space etc. before additional revenue rolls in. Ensure that you have a realistic forward-looking cash flow view of the business and plan for controlled growth while ensuring that you have adequate cash reserves to support expansion. This approach will ensure that existing operations are not jeopardised.

6. Ignoring Seasonality

Businesses with seasonal revenue/cash flow cycles often fail to adjust spending, accordingly, leading to cash flow shortages in slower months. Create a cash flow forecast that reflects seasonal patterns and build reserves during high-revenue periods to cover leaner times.

7. Not Having a Cash Reserve

Unexpected expenses or slow sales months can cripple a business without a financial buffer. Maintain an emergency cash reserve, ideally covering at least 3 to 6 months of operating expenses, to weather unforeseen disruptions.

8. Relying Too Heavily on a Single Client

When one client makes up a significant portion of your revenue, your cash flow is vulnerable if they delay payment or default. Diversify your client base as much as possible to reduce reliance on any single source of income. Although not always possible, diversifying your client base aids in protecting your business and cash flow stability.

9. Poor Stock Management

Excess stock ties up cash that could be used elsewhere. Conversely, too little stock can lead to lost sales. Implement stock tracking systems and use historical data to optimize stock levels and avoid over or under-purchasing. Where possible, suppliers can be engaged to provide stock on a just in time basis, thereby alleviating the need for your business to bear the costs too early on and/or eliminate the potential loss due to stock redundancy.

10. Failing to Forecast Cash Flow

Running a business without a cash flow forecast is like driving blindfolded. Without visibility, surprises are inevitable. Regularly update a rolling cash flow forecast, either weekly or monthly, do this to anticipate shortfalls, plan for expenses, and make proactive and informed decisions.

Conclusion

Cash flow mismanagement is a leading cause of small business failure, but it’s preventable. At wauko, we recognize these common mistakes and implement sound financial practices for your business. Allowing us to assist in the robust cash flow management of your business allows you to focus on the business without concern. In partnership, business owners can maintain a healthy cash flow position, make informed decisions, and build a foundation for long-term success.
Think wauko – think cash flow

At wauko, we help business owners implement sound cash flow strategies tailored to their growth. Contact Dale Petersen on 021 819 7802 or at dpetersen@wauko.com to strengthen your business foundation.