Everyone makes mistakes in life; it’s the only way to really learn, and it’s no different in business. For startups and SMEs, some mistakes can be extremely costly and will almost always be related to cash flow, whether it is due to a lack of it or cost. Below, we will discuss some common mistakes that businesses talk to us about and go through some potential solutions that enterprise leaders may adopt to either alleviate the troubles they are already in or, more preferably, avoid them altogether.

Inadequate Cash Flow Forecasting

To start with, understanding cash flow is not as simple as just making sure that more comes in than goes out and it is a reason why we talk to business owners about the importance of having a reliable cash flow forecast that can help guide financial decision making. It starts with outlining all your anticipated inflows and outflows, covering all the cash flow basics of sales revenue and expenses. Once an accurate forecast has been produced, the key is then to maintain it and ensure it remains up-to-date, and through this, businesses can handle potential cash shortages in advance by identifying and taking steps to mitigate them.

Mistake: A large part of why businesses fail, aside from running out of money, is because the data they are running on is inaccurate. Many companies will operate without an accurate or detailed cash flow forecast, and it eventually leads to unexpected shortfalls and financial pressures that cause them to liquidate.

Suggestions: Entrepreneurs should try developing a cash flow forecast that maps out income and expenses for at least the following 12 months. Update it regularly to reflect changes in your business situation, and then continue to utilise the data for informed forecasting. It is also wise to incorporate different scenarios, both problematic and potentially beneficial, to prepare for future outcomes that might strain or complement your cash.

Ignoring Seasonal Variations

Sales patterns for seasonal businesses are often all over the place, so it is important that any entrepreneur going into a seasonal trade can recognise and understand which parts of the year are going to bring in a positive cash flow and which will be a struggle. A retail establishment, for example, might see increased sales during the holiday season and then flatline, so by using historical data or research of the market, they can take appropriate actions and ensure the entire year pans out smoothly.

Mistakes: It is common for startups who have not done enough due diligence, but failing to account for seasonal cash flow fluctuations tends to leave businesses facing shortages during slower income periods, with the knock-on effect of mishandling the excess cash flow during peak times when some of it should be getting saved for the future.

Suggestions: To address this issue it is essential to analyse business trends and prepare accordingly, so save funds during high demand periods to cover costs when business slows down. You might also consider negotiating more flexible payment terms with suppliers to ease your cash flow cycle, or even explore financial solutions like a revenue based loan to help manage cash flow fluctuations effectively.

Overestimating Future Sales

Not so dissimilar to the problems faced by inexperienced seasonal businesses, and linking back to inadequate cash flow forecasts, enterprises that overestimate the value of their services can quickly run into problems if there are dips in the market or other unexpected bills come along. It is important to be conservative with numbers and have a financial buffer regardless of the industry you compete in, and you should always bear sales values in mind to keep your business financially stable and on track in the long term.

Mistakes: It is natural to be optimistic about sales and service performances, however business owners should avoid being too liberal with future sale productions, it will result in overspending, leaving vulnerabilities and cash shortages when real sales targets are not met.

Suggestions: Always be realistic with sales and service assumptions, you can achieve this by using historical data – assuming that is accurate! – and keep estimates conservative. Once again, regularly updating and reviewing your sales estimates will help keep everything in line with cash flow forecasts.

Poor Accounts Receivable Management

To ensure your accounts receivable are in good shape, whoever is in charge should really be doing more than just sending invoices out on time, even though this is important. Building a professional relationship with your customers can help ease issues if payments are missed, as in most cases it will be an honest mistake or miscommunication, however, you should ideally stay on top of your receivables to avoid late payments all together.

Mistake: It is a simple one, but letting invoices remain unpaid for extended periods is common across all sectors, and we hear about it often from businesses who are having cash flow problems because it ties up cash and leads to liquidity issues.

Suggestion: Set up a simple and effective system for managing your accounts receivable; this could include implementing timelines with your customers and ensuring they are aware of clear payment terms that you can follow up promptly and sternly on if invoices end up overdue. You could also consider offering early payment discounts to reward timely customers or make clients aware of late payment penalties to encourage them to pay on time. Once you have established a system that works for your business type, we advise that you continue to monitor your accounts receivable ageing report; this way, you can catch and resolve problems promptly!

Not Controlling Expenses

Another common problem many startups and learning entrepreneurs experience is a failure to control their budget. Actually creating a budget is of course the first step, and it is worth doing your due diligence on your sector or market to get an idea of what competitors’ budgets look like. Seeking a mentor who has prior experience in your niche can also be greatly beneficial in getting a head start on keeping your expenses controlled and your cash flow healthy.

Mistakes: Falling into the trap of unchecked, or overspending, that will rapidly drain your cash reserves and ultimately leave your business vulnerable. This is especially dangerous for startups that may be low on reserves already, and is a common reason why such a large number fail in the first year – they run out of cash!

Suggestion: Regardless of the industry, sector, or age of the business, we always suggest implementing a strict and thorough budget, enforcing a budgeting policy and meticulously tracking all of your expenditures. It may seem tedious at times, but regular reviews and trying to save the pennies will pay off in the long term, so give priority to investing in activities that will directly contribute to generating revenue and increasing profitability.

Inefficient Inventory Management

If you have ever worked in retail or a restaurant, you might be aware of how delicate a balance inventory management can be, especially if you are starting out. It can feel like another headache and can build unnecessary stress if there are frequent shortages, or you have made a large investment into a product that just is not selling. It can be tricky to learn what works, but with experience and ensuring you study your market, you will learn how to handle this common issue.

Mistake: It’s a double-edged sword that many suffer from, where holding too much inventory ends up tying your business for cash and adding layers of stress over the thought of shifting it, while too little inventory leads to missed sales opportunities, and cash flow suffers as a result.

Suggestions: The ‘Just-in-Time’ (JIT) is often a good place to start; this way, you can increase the efficiency of your management and decrease waste by receiving goods only when they are needed in the production or service process. You should also analyse your sales data regularly and learn how to forecast demands more accurately. Once you feel like you are back in charge of your inventory, you can adjust your stock levels accordingly and start with a fresh slate.

Neglecting to Plan for Unexpected Expenses

The antonym of overestimations and unexpected expenses ties in directly with our previous mention of future sales, and business owners of all ages, sizes, and current successes should have a plan to deal with unforeseeable issues. Every so many years different industries can expect downturns in their markets, and it should be expected, however sometimes events like Covid-19 come around, and even the most established brands can come under strain.

Mistake: It is as simple as failing to set aside a rainy day fund for large, unexpected bills, most commonly revolving around tax, that can lead to a potential financial crisis within a business.

Suggestions: To address the issue of vulnerability, it may seem obvious, but maintaining an emergency fund and ensuring it is added to rather than depleted and left will serve as a financial safety cushion and provide businesses with the funds needed to address unexpected expenses. We suggest saving anywhere between three to six months of operation expenses to avoid disruptions and also, in a case like Covid, help postpone the point where cash flow is directly impacted by the emergency.

Mismanaging Debt

When utilised correctly, debt can be one of the most efficient tools for businesses to make more money; however, the proper management of any debt that your business takes on needs to be careful, thorough, and backed by a strategy. From the get-go, you can aim to secure a facility that is well within your company’s budget, and getting professional advice from your financial advisors is a must. Once again, doing the right due diligence on your potential lender will also save future headaches if they are less than above board!

Mistakes: The first problem is typically that a business will take on too much debt, although with advancements in Financial Technology (Fintech), this is becoming rarer. Debt mismanagement closely follows and almost always leads to a strain on cash flow and lots of distress for those who are responsible for repayments.

Suggestions: Only borrow what you believe you can realistically afford, and thoroughly analyse the terms and conditions of any facility you are intending to take on – lower interest loans are of course less damaging on the wallet however will likely result in a longer repayment term, so bear that in mind. This way, even if cash flow becomes a problem at any point, the business will not immediately fall under it. If you do take on any debt, we suggest regular reviews to ensure you remain within manageable limits.

Lack of Financial Contingency Planning

A financial contingency plan effectively brings all of our previous points together and should outline the actions that your business would take in response to various different cash flow challenges. It should typically include a number of strategies that cover expense reduction, negotiating, emergency funds, and any other area that will help safeguard your business from financial stress.

Mistake: By not having a thorough contingency plan in place you will not have a holistic view of the potential financial issues you could face, and similarly to neglecting to plan for unexpected losses, however encompassing the entire spectrum of cash flow problems, could leave your brand vulnerable without.

Suggestion: Your solution will lay in crafting a contingency plan that is unique to your business and one that you can be sure is capable of handling different cash flow emergencies. Be thorough and realistic with numbers, and then start applying them to the areas that need them, whether it is for expense control, that rainy day savings reserve, or simply ensuring you are working on your cash flow forecast. Regularly review your contingency plan and make sure it remains relevant!

Final Thoughts

Understanding cash flow and ensuring you are effective at managing it will always be relevant to the well-being and sustainability of any business, regardless of industry or sector, and learning how to avoid the common mistakes that almost every budding entrepreneur has faced will help ensure your own enterprise grows and thrives. Due diligence, talking to seasoned experts, regular updates monitoring and being realistic about the numbers will help create a foundation for success, and with experience, there is no reason why cash flow should be a problem in the future.

Make better Cash Flow decisions with Pulse.

Fintech tools for accountants and entrepreneurs are growing in popularity, and for good reason. Our product, Pulse, integrates seamlessly with Open Accounting and Open Banking software, offering real-time data insights and personalised analytics to produce small business financial intelligence. Pulse, specialising in cash flow forecasting, performance reporting, and actionable financial insights, empowers SMEs to optimise their financial management. Sign up today to revolutionise how you manage your cash flow and drive your business forward.