Every business owner must understand how important cash is for the smooth operation of the business. This makes it essential for a business owner to manage money (cash flow) properly. Most often businesses tend to get caught up with so many activities that they neglect to manage cash flow successfully. After being a part of several startups, we have come up with a list of mistakes that most businesses tend to make while managing a business’s cash flow.
Cash flow mistakes every business must avoid
Below, you will find a few cash flow mistakes that you must avoid –
Not keeping proper financial statements
Keeping and monitoring financial statements periodically for your business can help you be in financial control. A cash flow statement is referred to as a financial statement that provides you with detailed insights into your company’s expenses. These are the documents that most stakeholders rely on to value your business. In case you do not keep proper records, there are huge chances of misinterpreting your business’s progress, ultimately leading to bad decisions. In short, it is vital for every business to keep proper financial statements.
Confusing cash flow with profit
Most often business owners tend to track special metrics to understand the performance of their business. This is where most businesses confuse cash flow with profit. Cash flow is the net income of cash moving in and/or out of the business at any particular point in time whereas profit is the money that remains when you subtract all the expenses from the revenue. It is possible for businesses to have profited while having negative cash flow and vice-versa.
Therefore, it is important for you to understand that both cash flow and profit are two different metrics.
Not being prepared for tough times
Having a backup for rainy days while running a business is very crucial & wise. There might be a case where your payments are delayed and you end up with insufficient funds to pay your dues or don’t have funds for any emergency stuff like sudden equipment repair etc. This is why it is critical to plan the cash flow for your business. These are the kind of situations that prove the importance of maintaining a rainy day account.
Here are a few things that you can do to be ready for a rainy day in your business –
- Set a monthly goal & set aside a few bucks every month.
- Maintain a separate rainy-day account
- Allocate a decent amount of profit for a rainy day
- Always try to cut on non-essential expenses.
Not focusing on late payments
Another huge cash flow mistake that businesses make is not focusing on late payments. Late payments can become an issue and disrupt the entire flow of cash for a business. If you don’t follow up on the late payments, there might come a time when you run out of cash to pay bills on time, putting your own business at risk. This is where you should understand that late payments cannot be avoided but can be managed with the right plan of action. Here are a few things you can do for this –
- Clarify to your customers in advance about penalties you might be charged for late payments.
- Setting payment reminders can also help resolve the issue of late payments.
- Consider rewarding customers who make early payments – either give them a discount or offer them any additional service for free.
This is where tools such as Paci Finance come into play. They have a proper cash flow dashboard using which you can track the cash flow of your business. So, what are you waiting for? Sign up today to check out all the interesting features it has to offer and make your business a healthy one.
Not administering inconsistencies
This happens mostly in seasonal businesses. These are the businesses that operate either in one search or in two seasons throughout the year. In this case, as a business owner, you should look for ways to make sufficient income during the high time of business which will keep you afloat during the slow period. During the time when your business is slow, you can consider partnering up with other businesses or hosting events and distributing product samples etc.
Inefficient tax management
Another very common cash flow mistake that most people make is not managing their taxes properly. We have seen most businesses file tax returns either late or incorrectly. This is where we highly recommend you meet a tax consultant every year who would help you calculate your tax and file the returns. A good tax plan accounts for all tax consequences and calculates your income on the basis of which you can plan activities.
In the end we just have to say that every business must learn from the mistakes of others. Especially when it comes to cash flow management, it is critical to understand its importance and learn how to manage it properly to avoid certain problems that most businesses face by neglecting to do so.
Luckily, there are many tools using which you can easily manage your cash flow and look at cash flow insights. One such software is Paci Finance – It is one of the fastest growing financial management software that is designed to tackle all kinds of financial challenges that come in the way of running a successful business. Their cash flow management features allow you to be on top of your business’s cash flow status, allowing you to take the right action at the right time.