3 Common Cash Flow Mistakes that Small Businesses Make

Cash flow problems are among the main reasons why small businesses close their doors. According to a study by the U.S. Bank, as many as 82 percent of startups and small businesses fail due to poor cash-flow management. Most cash flow problems can be avoided if the small business owner plans correctly and acts decisivelyLet’s cover the 3 most common cash flow problems and simple solutions to consider.  

Not having enough working capital 

The number one problem small business owners have is a lack of working capital. Working capital is the money necessary to keep the business going during the initial startup phase or during a slowdown of the business.  

Similar to how one budgets their household accounts, a small business should have enough cash to cover a minimum of three months, and preferably six months, of operating expenses at its disposal. Having an adequate amount of money available will help businesses survive a downturn in the economy or a slowdown within their industry. 

Unorganized accounts receivable process 

 As a small business owner, it can be hard to manage the daily operations of the business and stay on top of the accounts receivable process. Being passive in collecting your accounts receivable is a fast way to cash flow crisisThis is a compounded problem. You not received the money for the job completed, but you also have already paid out of pocket for materials and labor.  

One way this dilemma can be curtailed is by implementing company policies and sticking to them. First, take the time to create clear collection policies including late penalties for customers who are slow to pay. Second, send your invoices out immediately after job completion. If possible, request an initial deposit for longer jobs or payment in full at the completion of the job if a shorter jobFinally, utilize automated payment reminders when you can. Most POS or accounting software applications provide the opportunity to create automated payment reminders so that any client with a past due balance will receive regular notifications about the past due balance. 

Overestimating future sales 

The small business owner is ever optimistic. This is a trait that helps small business owners keep moving forward even when it seems like all the cards are stacked against them. This optimism may keep them ambitious, but it does need to be kept in check to ensure that they are not over projecting their anticipated sales volume. 

All businesses will over– or underestimate their sales forecast periodically.  Your business should create sales projections on a regular basis and evaluate past sales projections. These projections can be hard to create during the startup phase of the company. You can ask the Small Business Development Center (SBDC) for assistance and/or you can find a mentor from within your business industry. As you create your projections you want to ensure that they are being done conservatively. 

Planning properly for your businesses financial success is one of the most important steps you can take in your business planning. If you need assistance with your cash flow projections, the University of Mary Washington Small Business Development Center is here to help. We provide training webinars and free, confidential business consulting. Fill out a Request for Consulting form or register for a webinar at our website www.umw.edu/sbdc.