Cash and time are limited, and they should be allocated efficiently. According to a CBInsights survey, the top reason for their failure was running out of money. In fact, 38% of startups fail because they run out of cash.
In September 2019, augmented reality startup Daqri closed down after burning more than $250M of funding and failing to secure a new round of financing from investors.
The impact of poor money management isn’t just limited to startups; even established businesses can witness a drop in growth.
Some common mistakes that result in cash flow issues include miscalculation of profits, forced growth, inadequate preparation for a lean period or crisis, difficulties collecting payments, and more.
Sales and inventory stagnation, both of which directly affect revenue, are the first indications of cash flow issues. In addition, poor financial management and forecasting can also contribute to multiple cash flow problems in your business, preventing you from paying your bills on time.
Before we understand these cash flow mistakes that hinder business growth, let’s revisit the term – business growth.
What is Business Growth?
Business growth is an organization’s expansion in terms of customer base expansion, revenue growth, market share expansion, or product production. Each firm has a unique ecosystem, so there is no standard approach to measuring business growth. However, an increase in customer base, revenue, or market share is often a sign of business growth.
There are four kinds of business growth, each of which looks at growth from a different perspective and adapts to different phases of development.
Organic: Organic growth requires physical business expansion, including producing more goods, expanding product lines, working on several shifts, renting large spaces, opening new stores, etc. This approach lets you meet demand and serve more customers as you introduce new product lines.
Strategic: Companies that have grown organically and have long-term goals can benefit from this approach. These companies invest the money they make during organic growth into strategic expansion programs. Entering new markets and reaching new audiences through advertising campaigns, for example, are among the possibilities.
Internal: Rather than focusing on production, this approach to business growth seeks to maximize the company’s efficiency by using current resources more efficiently. This can include outsourcing finance and accounting operations to experts like IBN Tech to save on operational costs.
Partnerships or Merging: This approach focuses on cooperating with another company for mutual benefits. This collaboration helps firms launch a new product together, produce more goods, grow the markets of both parties, and gain customer loyalty from the other company.
No matter what growth strategy you have or which stage of business you are at, cash flow mistakes can make your growth suffer.
Let’s discuss how you can avoid making cash flow mistakes.
Avoid These 6 Cash Flow Mistakes to Keep Growing
The following mistakes are the most common ones which should be avoided in an ideal world.
1. Confusing Cash Flow with Profit
One of the biggest mistakes happen with cash flow is it gets confused with the profit.
When business owners are searching for that one key metric to gauge the financial health of their firm, cash flow and profit are often pitted against one another. Revenue is vanity; Profit is sanity; Cash is queen.
Cash flow is the net income of cash moving in or out of a company at any given time. Profit is, however, the money that remains after operating expenses have been deducted from revenue.
Your business can be profitable and have a negative cash flow at the same time, which makes it difficult for you to pay even regular expenses. In contrast, it can also have a positive cash flow, but you hardly make any profit (often in the case of startups and scaling businesses).
Let’s say you buy a piece of furniture for Rs 6000 and sell it for Rs 10000, making 40% on every sale after accounting for minor expenses. However, when you prepare your balance sheet at the end of a quarter, you might be surprised at your company’s losses. This is because your calculations haven’t accounted for shipping costs, transaction fees, and storage and return fees (which may differ for each sale).
Incorporating such expenses is a crucial step in determining if there is enough money in the account to meet all of your expenses. You must first subtract your current expenses and future costs, like taxes, from your revenue in order to maintain a healthy cash flow. Your business won’t be profitable unless there’s enough money left over after this.
2. Forcing Growth
Many business owners force growth by spending more on operations, marketing, or sales unnecessarily. It is true that you’ll have to spend more money in order to acquire the desired growth rate, but everything should be calculated. And if you force growth without the calcuation, you make another biggest cash flow mistake.
Suppose you run an influencer marketing campaign for your B2B business and spend $2k in a month. The results are awesome, and you get 100 quality leads. This necessarily doesn’t mean that if you triple the spend, you’ll get triple the results.
You must handle these quick efforts to avoid losing too much cash, which would severely impact your day-to-day operations. These extended services increase revenue, but they also increase cash outflows. By anticipating these cash drains in a timely manner, you may be better prepared for emergencies.
You must handle these quick efforts to avoid losing too much cash, which would severely impact your day-to-day operations. These extended services increase revenue, but they also increase cash outflows. By anticipating these cash drains in a timely manner, you may be better prepared for emergencies.
3. Ignoring Seasonal Business Nature
This cash flow mistake impacts businesses that do not operate for a whole year. These businesses are tremendously cash-rich during peak seasons but have difficulty handling daily cash outflows.
It is difficult to maintain overhead commitments when cash-rich seasons end and money becomes scarce. Furthermore, these off-seasons lead to lower margins via discounts and promotions in order to sustain some level of sales.
Your financial plan should foresee enough provisions for these off-seasons. For instance, jewelry demand during the holiday season is exceptionally high. However, for the rest of the year, sales deplete rapidly, resulting in lower cash inflow. Therefore, you must keep cash aside for fixed expenses during the off-season.
Here is what you can do about that:
Set monthly or quarterly goals and set a fixed amount aside every month
Keep a separate account for such off-season periods so that you don’t unknowingly spend the cash elsewhere
Make sure you cut down unnecessary expenses during the off-season
4. Handling Too Much Credit
This cash flow mistake costs more than you expect.
If your customers are late on payments, it can be damaging to your business because you will be unable to pay your suppliers. Moreover, it won’t be easy to maintain future credibility if your vendor is not willing to wait for his payments. As a result, you will be unable to pay off operating expenses on time because a large portion of your working capital will be blocked.
Having too much credit can hinder working capital needs, and suppliers might lose faith in you because payments are oftentimes not received as promised.
It is true that you cannot completely eliminate late payments from your clients, but you can reduce that.
Here is how:
Proactively communicate the late payment penalties you might impose on your clients.
In case you don’t charge penalties, you can remind your clients about payments (employing a billing management system for this cause is the best approach).
If a client is unable to make payment for a lengthy period, you should renegotiate the terms.
Reward clients who make early payments. You can even offer a discount coupon for a limited period.
5. Ineffective Tax Management
Paying your taxes on time is an obligation whether you pay once a month, once a quarter, or once a year. Delaying the payment or making mistakes filling out your taxes may result in interest and penalties, as well as an audit by the Income Tax authorities.
There are many costs associated with making an error when filing taxes, but it also takes up a great deal of time.
Therefore, keeping track of your taxes is important; make sure you pay them on time. Not only this, unexpected taxes or penalties burden can hamper your cash reserves.
You can meet with your business’s tax consultant to determine the amount of tax you will owe at the end of the year. After considering future business operations’ cash flow needs, you should create a tax plan, or maybe your accounting company can handle it for you.
A good tax strategy considers all tax consequences and calculates your income, allowing you to plan for long-term success. Again, saving your company from risky tax rates that might negatively impact cash outflows is also a benefit.
6. Hiring Bad Employees
Even if it is unavoidable, a bad hire can have a significant impact on a company’s cash flow. A bad hire is expensive in several ways. Recruitment ads and posting job listings are two of them.
Even after an employee has been hired, there are still onboarding expenses. The new employee may not be as skilled or as productive as someone with experience, which is another potential problem.
Beyond the monetary cost, a bad employee can cause significant damage to your business. When a bad hire leaves, he leaves behind a trail of devastation – time, productivity, and, ultimately, revenue loss. You’ll be back where you started, with a job to fill.
Thus, always create and implement an efficient hiring procedure. Maintaining cash flow will not only prevent bad hires but will also help keep the company open.
Learn From Your Mistakes to Maintain Healthy Cash Flow
Keeping your business financially secure is a significant function of cash flow management. To avoid common cash flow problems, track cash closely and frequently examine your cash flow statements. If you want to expand your business, collect your receivables on time, account for your expenses, and monitor your profits.
You should avoid expanding your company if you cannot afford it or prepare for slow days if you want to expand it. However, you may expand your business while meeting its obligations if you maintain a good cash flow management plan.
