We all want our business to have continuous success and as an entrepreneur, we will do our best to achieve it. But even if we are doing our best, we cannot deny that everyone makes mistakes whether we intend to do so or not. However, surrounding your company with the right people and knowing the best practice to succeed in your business are ways you can avoid some common mistakes that business owners make. Having a positive cash flow is one of the most common challenges that business owners face.
Here are some things that you should not do when creating one of the most important planning tools for your business which is cash flow forecast:
Having No Clear Written Business Plan
Having a business plan should be the first thing that every business owner must have to provide a clear roadmap to success. The business plan outlines your business’ sales objectives and what expenditures you need to plan for to support and achieve your sales objectives. This will keep you focused on what you need to do and control your spending to necessary expenditures that will support your business goals.
Setting up Chart of Accounts Incorrectly
Setting up your chart of accounts correctly in your company’s accounting system involves the crucial step of understanding the different types of costs and expenses and how these behave in relation to sales. Understanding these expense and cost behaviors help in defining the sales target and the necessary expenses. The most fundamental is identifying the variable costs and the fixed costs that are the key drivers in preparing your cash forecast. The variable costs are costs directly incurred in providing the products or services while fixed costs are those costs that you will incur regardless if you have revenues or not. That is why it is important to set-up correctly your various expenses into either a variable cost or a fixed cost as this will help you prepare a correct cash flow forecast, most importantly, when you have a seasonal business. The DIY (Do-It-Yourself) accounting system like QuickBooks Online is not equipped to assist you in identifying what are the variable costs and fixed costs. The best way is to consult with your bookkeeper to assist in setting up your chart of accounts correctly.
Improperly Classifying COGS and Operating Expenses
Classifying your cost of goods sold (COGS) and operating expenses to the right accounts is very important. It’s because these expenses are used to determine your product or service gross margin. If you fail to determine your gross margin correctly, this may lead to incorrect pricing and ultimately not having enough margin left to cover your overhead expenses. With this scenario, it is just a matter of time before you run out of cash and ultimately close shop.
Is the demand for your product or service too low? Maybe your pricing is too high? Do you have a high sales volume but the revenue receipts are not enough to cover your expenses? Maybe your pricing is too low? It is not only important to provide a high-quality product or service, it is equally important to price it correctly to be profitable. In addition to doing an environmental scan to know what the market pricing for your product or service, you need to have a good cost accounting system to capture, report and monitor your cost. A combination of analyzing the market pricing and your production or service cost will provide you the right information to make an intelligent pricing decision for your company.
Uncontrolled or Unmonitored Spending
Whether it is a small or huge spending, it is always a good practice to monitor all the expenses you incur in the business. A good system to establish in your business is to define a certain dollar threshold that will be considered as a major expenditure for your business. Once your spending is more than this dollar threshold, you perform a business review to determine if this expenditure will provide the return on your investment or if this particular expenditure will support or help you achieve your business objectives. Always review your expenditures against your budget or forecast and make sure to report major business expenditures to your bookkeeper for more accurate financial records.
Having No Idea of Business Break-even Point
This is bad if you have no idea of at what level of sales you need to break-even. Break-even point is the point where you have neither a profit or loss in your business. Start-up companies usually use this as their goal in their first year (at the minimum, have a target or desired sales in order to break-even on the 1st year). Without knowing this, you are blindly running your business and hope for the best that you will generate enough revenue to pay all your bills and start making a profit. To know your break-even point, you need to know your variable costs and your fixed costs. Here, we emphasize the importance of setting up your chart of accounts correctly and identifying your variable costs and your fixed costs. These all ties to managing your business cash flow effectively.
Not Monitoring Past-Due receivables
This is one of the common mistakes of business owners. If you fail to keep track of your receivables, you may end up looking like you gave your products or services for free. Receivables are the money you should receive from your clients for the products and services you have provided them and letting this past their due date without taking any action (sending statement of accounts, calling the clients to follow-up, etc.) will negatively impact your business in no time. Even if you are sure that they will pay you even if it’s late, letting receivables remained outstanding for a long time does not help your business cash flow. If you continue to do this, you end up financing your customers’ business while you incur negative cash flow and don’t know where to access funding to pay for your bills and payroll.
Late Billing for Products or Services
Surely, most especially if you are not a non-profit organization, you are not doing business for free. It is a good practice to send invoice to your clients on time. If you are likely getting derailed by the day to day activities of your business and billing is set aside until you have time, you may be losing more than you think. The best way to approach this is to engage a bookkeeper to handle the billing and collection for your company. This way, your bookkeeper will be able to send the invoice on time, follow-up the payment, and record and apply the payment to the corresponding invoice. This will keep your receivables record current and accurate.
In summary, to achieve a healthy cash flow, remember to implement the following best practices for your business:
If you need help in achieving a healthy cash flow, bookkeeping, and tax preparation, contact us today at firstname.lastname@example.org or 832-437-0385. We surely won’t let you and your business down.
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