Any business owner knows that managing cash flow is crucial to the success of a business. As long as more cash is flowing in than flowing out, your business can be robust and stable — and continue to grow. While this is obvious in theory, it’s not always easy to achieve in practice, especially for business owners who are unaware of the common problems and pitfalls that can negatively influence cash flow.
Since cash flow failure can spell doom for a business, you need to be aware of these problems and how to steer clear of them to keep your company thriving. Here are some of the top mistakes new business owners make — and how you can avoid them.
Not keeping a cash cushion.
Many of us go through thin times when having a cash reserve is impossible. Starting a business in such circumstances would be risky. Because businesses, especially in their early phases, go through ups and downs, you will need that extra cash padding to make sure you meet all your obligations. Depending on the size and nature of your business, calculate how much cash you need to survive should your operations be put on hold or if income flow ceases for approximately three months’ time. If you plan to start a small business but don’t have a cash reserve, delay your start date until you have built an adequate fund. Then, create a separate savings account for your cash cushion. And, as soon as possible, start adding to it. This account should remain untouched except in the event of an emergency.
Something about the thrill of launching a new business, like the thrill of buying a house or planning a remodel, can prompt overly exuberant shopping. You have a list of necessary purchases and have budgeted for them, but as you shop, you keep noticing other products or programs that seem enticing. Do not impulse buy, no matter how appealing a product looks! Find out whether you really need it, if it could realistically add value to your business, and whether you can afford it without sacrificing necessities or dipping into your emergency reserve.
Failing to budget – and bank – smarter.
If you don’t know every detail of your projected expenses, you can’t budget for them. Go over every aspect of your business plan and consult a professional to make sure there are no hidden fees or costs you aren’t accounting for. Next, create a budget that is both exhaustive and realistic — one that doesn’t hinge on windfalls, deals, sales, or bargains and doesn’t rely on overly optimistic sales predictions. Most importantly, stick to that budget! You will need to be meticulously organized in order to adhere to your budget, so consider using apps or software programs to help.
Another crucial component is having the best small business bank account available. When choosing a banking institution, your checklist for optimal features should include free instant deposit and an option to sync with your payroll, to help you streamline your processes. Other important perks to look for are high-yield interest, no minimum fees, and cash flow forecasting.
Getting behind on your bookkeeping.
No matter how much you pride yourself on self-reliance, when it comes to managing your books, the risks of falling behind or making errors are significant. You don’t want to get into a bind just because you were multitasking and your records got away from you. Paying employees, attending to payroll as a whole, filing your quarterly estimates, and paying federal taxes all require organization and vigilance, so consider hiring an accounting service like Northeast Financial Strategies to help make a tax plan, do your accounting, or at least, double-check for you as you go.
You should also regularly review your records and store them safely where you can easily access them, whether physically or online.
Even a small period of bad cash flow can be a warning sign, so plan well and watch your finances closely. If you stay vigilant and proactive before a problem arises, chances are, you will easily avert it.
Northeast Financial Strategies (NFS) has an array of resources to help small business owners stay on top of cash flow and other aspects of financial management. Book an appointment today.
This article provided by Amy Collett of bizwell.org