Small Business Cash Flow Blunders

Cash Flow. It should be a four-letter word. (Actually, it’s two four-letter words, but who’s counting?)

Cash flow can be a headache for almost every small business owner. Making sure that more money comes in to your company than goes out is always job #1…but it’s seldom that easy. Stuff happens. There will always be emergencies and sometimes your luck is just bad. But many cash flow problems can be avoided if you avoid a few common blunders. Here are four. If you’ve avoided them, congratulations! If you’ve fallen victim, then work with your team to figure out where you’re going wrong.

1. Bad Cash Flow Forecasting

Nobody’s perfect. And if you’re right 100% of the time when projecting your cash inflows and outlays for the next year (or even the next quarter), you’re probably making financial history.

But if your forecasts are consistently off by enough to cause your company serious financial strains, there’s something wrong.

Are your revenue forecasts wildly optimistic? When it comes to the sales pipeline, are you accurately distinguishing between likely orders (probability of at least 90%) and possible (probability of 50%)?

On the expense side, are you accurately estimating costs for supplies and inventory? Did you not account for overtime pay? Were long-term expenses absorbed by your working capital funds?

These are broad examples, as every company has different demands on its money, but some careful inspection of your cash flow statements should be able to uncover where your forecasts were off.

Tip: Get your accountant involved with your business cash flow forecasting. If she has experience in your industry, her insights can be invaluable.Besides, accountants tend tobe conservative, and that’s the side you should err on.

2. Aging Receivables

This is always tough. Especially when your company is growing and the economy is shaky and you don’t want to risk making someone angry, it can be easy to talk yourself into letting aging receivables slide another few days which can turn into a couple weeks…and suddenly you’re in a cash crunch.

Ironically, it tends to be the biggest accounts that tend to let your invoices sit the longest. Why? Probably because they can.

At any rate, this is a good time to remember the advice about the squeaky wheel getting the oil. Follow-up – politely! – on day 31, and say that you’re just checking on all your outstanding invoices (you’re not singling this customer out) and were wondering if a payment had been scheduled or a check cut.

Another strategy: Be proactive. Offer a percentage discount of the amount owed if it’s paid within five business days of the invoice date.

Tip: If late payments are consistently a problem, or if you just don’t like working with aging receivables, consider an invoice factoring program with MP Star Financial.

3. Binge Spending

Companies can be guilty of binge spending, just like individuals. Do what your father suggested – make a budget and stick to it. This goes for every major expense category, including personnel, inventory, supplies, equipment, and rent and utilities.

Don’t fall into the warehouse store mentality. Do you really need that six year supply of printer paper? And yes, another assistant in the production department would be nice, but maybe you can get by until the end of the year.

Tip: There will be exceptions, but only those that can yield substantial payoffs. If you have an opportunity to acquire vital equipment at a deep discount, or hire a superstar salesperson from a competitor, and you can justify it as a smart investment, then figure out how to make it work.

4. Credit Extension to the Wrong Customers

Uh-oh. You wanted this order badly, and you figured it would somehow work out, no matter what Dunn and Bradstreet said. But you’re getting stiffed on a payment.

Face it, when you extend credit to a customer, you’re actually loaning money to that customer. This is where an ounce of prevention is your best friend. You maybe don’t have the resources that a bank does to check trade references, but you need to spend as much time as you can to make sure you’re comfortable with the arrangement.

Tip: On large or custom orders, insist on a down payment. If the customer bristles, tell them that your bank (or attorney, or accountant, or investor group) requires it.

Image courtesy John P. Warren

Are cash flow problems impacting your company’s ability to grow? Stop waiting 45 or 60 days for payments! MP Star Financial can help you get a better handle on your business cash flow management. Call for more information. (800) 833-3765, extension 150.

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