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 email@example.com or 832-437-0385. We surely won’t let you and your business down.
We help you plan, forecast and analyze your financial data
so you can get on top of your finances today to grow your
small business big tomorrow.
2018 Q3 tax calendar: Key deadlines for businesses and other employers
Infographic: Tools to help you reach major financial goals.
10 Tips to Remember to Achieve A Sound Financial Management Process for Contractors
Make New Years Resolutions to Improve your Small Business Profitability
Basic Bookkeeping Tips and Tricks for Startups
Small Business Bookkeeping Quick Guide: Easy Steps To Success
9 Essential Bookkeeping Practices For Small Business
3 Reasons why Keeping Accurate Records is a Must for your Business
3 Major Financial Statements Your Business Should Have
5 Small Business Bookkeeping Pains That Need Qualified Temporary Staff
7 Bookkeeping Mistakes You Should Never Make
How Simple Bookkeeping Mistakes Cripple Dental Clinics in the US
Petty Cash Risks and Controls Best Practices Preventing Small Business Fraud
Cutting Costs When You Have Gone Over Budget
10 Tips to Achieve a Stress-Free Year-End Financial Closing and Tax Preparation for your Medical Practice
Warning: 5 Ways Incompetent Bookkeepers Can Ruin your Business' Financial Records
The Secrets of Budgeting: 6 Steps to Develop a Perfect Budget Plan for Your Non-Profit Organization
Not Necessarily a Luxury: Outsourcing
Big Data Strategies for Every Business
Meals, Entertainment, and Transportation May Cost Businesses More Under The TCJA
How to Feel Secured: 5 Questions to Ask Before Hiring Your Next Outsourced Bookkeeping Service Firm
Business Interruption Insurance Can Help Some Companies
What Every Non-Profit Must Have for Financial Stewardship and Accountability
What You Don't Know Can Hurt You: How to Avoid Trust Account Violations for Lawyers
Your Construction Business May Not Be Doing as Well As You Think Due to Inaccurate Financial Information
4 Cost Centers That Every Medical Practitioner Must Monitor & Control to Be Profitable
It's Time to Get More Creative with Retirement Benefits Communications
7 Quick Ways to Avoid Common Bookkeeping Mistakes for Nonprofit Organization
7 Ways To Prepare Your Business For Sale
4 Common Financial Mistakes You Should Avoid for The Benefit of Your Medical Practice
Building A Sales Prospect Pipeline for Your Business
Infographic: Under the New Tax Law You Can't Deduct Hobby Expenses
Do You Make These 4 Common Construction Bookkeeping Errors?
Home Vs. Away: The Company Retreat Conundrum
4 Tips on How to Avoid Common Pitfalls of Bookkeeping for Legal Firms
Tips on Costs Reduction That Every Non-Profit Organization Should be Aware of
L.E.A.R.N. to Earn: How Can Medical Firms Cut Costs
Tips on How to Reduce Your Law Firm's Overhead Costs
Fun fact: What's the connection between the dollar and the Spanish peso?
Four Ways to Reduce Overhead Costs and Increase Profits in Your Construction Business
Manage Health Benefits Costs With A Multipronged Approach
Do you Really Know How Much your Product Cost? You May be Surprised!
No Harm, Just MEDICINAL: 9 Benefits of Outsourcing Your Bookkeeping
Cost Control Takes a Total Team Effort
How to Set Up An Accountable Plan
Should I Outsource? 7 Advantages of Outsourcing the Bookkeeping Tasks of Your Construction Business
Putting Your Child on Your Business' Payroll for The Summer May Make More Tax Sense Than Ever
Putting Your Child on Your Business' Payroll for The Summer May Make More Tax Sense Than Ever
Money Management: 5 Tips to Benefit Your Solo Law Firm's Bottom Line
6 IRS Audit Red Flags That Your Medical Practice May Be At Risk
3 Keys To a Successful Accounting System Upgrade
How to Avoid Getting Hit With Payroll Tax Penalties
5 IRS Audit Red Flags for Construction Business that You Need to Know and Avoid
Choosing The Best Business Entity Structure Post-TCJA
Take H.E.A.R.T.: How to Maximize the Limited Resources of Your Nonprofit Organization
7 H.E.A.L.T.H.Y. Financial Management Tips for Your Medical Practice
How to Make Sense of your Business' Financial Information