The greatest failure is not knowing what you could do to avoid common cash flow problems that could kill your business.
Cash flow problems are real. Nine out of ten small business owners failed because of poor cash flow. We all agree that cash flow is important to keep your business in the game. But the real question is how will you play? The FAS financial advsiros advice is to avoid cash flow problems.
The rule is simple: Keep the cash flowing to keep your business running.
And keeping the cash flowing means avoiding the most common cash flow problems that most startup small businesses encounter in the early period of business operation.
1. Modest estimate of future sales volume. Many starting business owners get overexcited and commit a fatal mistake of overestimating future sales volume. Ever heard never to count the chicks before they are hatched? Also, true for business. Practicing modesty when performing your forecast could take you closer to the real sales figures.
Keep your objectivity in matters of numbers. Always reflect on the unfortunate reality that the quantity of interested buyers does not equate to the quantity of actual purchases. Realistic sales forecasting is about real evidence of the numbers based on history records and not on unverified assumptions or subjective intuition.
Get professional help if you need it, but never act on half-baked instincts when it comes to numbers that could make or break your business.
A quantitative forecasting requires actual revenue data from early period of operation. You can also use data from other businesses in the same industry if you are just starting out and have no prior sales records to track trends and calculate future sales projections. Following the objective method to forecasting with real data as your basis to predict the future sales, you have higher chances of avoiding overspending that could get you out of the business game sooner than you expect.
2. Calculate spending risks before spending. It’s easy to get impulsive with spending when you are starting a business. But don’t give into impulse finding comfort in the thought that you need to spend money to make money. You do better, be smarter. The early periods of business operation is crucial to your survival and spending on impulse will not get you anywhere near success.
What many rookie entrepreneurs miss to understand that while you may need to spend money for your business, make sure your expenses will benefit your business with an attractive return of your investment. Measure your profitability.
Identify the things your business actually needs and calling in for professional help will save you a lot of unnecessary expenses. Keep in mind that every dollar you spend is a dollar pulled out from your profit margin. It helps to have a budget, a realistic budget.
When you calculate for the breakeven point of your business, your impulse purchases or unexpected expenses for that matter are not included. And when you spend more than you should based on your budget plan, you should expect a delay in your breakeven point. So, while you may feel that a coffee machine could make your employees happier, you might just want to delay that a little longer.
3. Make the due diligence to collect payments. Common to most new business owners is the mistake of overlooking past due receivables. Unpaid invoices can run your cash flow dry and kill your business quickly. It spells danger when you have no strict payment policies that should penalize late payments.
You don’t want to be the last vendor getting paid; that is, if you will get paid. And most of the time, the vendor with the weakest collection strategy almost always don’t get paid and closes shop soon. You should implement clear collection policies with a 5% penalty for late payments. Make sure you don’t miss to send a payment reminder. And if you are keen on exploring the opportunity to collect accounts receivables soon, it may be worthwhile to try giving incentives or discounts for advance and early payments.
If you are still manually running your business, you could be missing one too many collections. Automation is the key to getting paid on time and fast. More importantly, automated payment process is less likely to miss past due receivables and you save precious time.
You will find that there are a number of tools in the market you can use to help you manage invoicing and billing as well as payments collection. But we can save you the research time. You can download the mini eBook for free to access a comprehensive list of over 300 financial tools to help you get started.
4. Create a cash flow budget. The heart of your business is your daily cash flow. Your cash inflow should be higher than your cash outflow to keep you in business. And if you have no spending limit, which means you have no cash flow budget, you are on the road to business failure.
Business is not always at peak season and you are not at a luxury to overspend if your objective is to survive and thrive. Choose the smart route to running your business with cash flow budget that will help you prepare for difficult times. Creating a cash flow budget also helps you to pay your bills on time without having to spend extra for penalties.
5. Keep cash cushion handy. You can have as many preventive measures to avoid cash flow problems. But it can only take one slow sales month to bring your operation down and if you don’t have a cushion of cash to keep your business going, your only option is to close shop. It’s never too much to prepare for cash flow hiccups, which means don’t run out of cash.
Never run a business on zero balance savings account for business safety purposes. It is recommended to have savings equivalent to a two month operating expenses in case you will experience lean periods. Your cash reserves will keep your operations going until you can recover.
You can stay ahead of the game by keeping sharp of the cash flow pitfalls before you hit it.
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