Critical errors in managing business cash-flow
Managing cash flow is every small business owner’s most important function. Avoid these mistakes to keep cash-flow strong in your business.
1. Using the “fly by the seat of your pants” accounting method.
Owners suffering from a vague feeling that someone, somewhere owes them money but, they just can’t remember who it is. These businesses are all guilty of operating with the “fly by the seat of your pants” accounting method.
Using this accounting method has a tremendous impact on a business’s cash flow. Without a system to track business finances, companies will always be operating in the dark.
2. Not knowing what the numbers really mean.
When a business invests the time and effort to implement a truly useful accounting system, that’s where the real fun starts. Now they have numbers but in some cases the numbers are all but meaningless to the business managers themselves.
Understanding what the numbers mean is crucial to a businesses’ overall cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product or service more profitable or better selling than another? How many clients does the business need to meet expenses each month? Can the owners afford to pay themselves this month and if so, how much? The answers all lie in the numbers.
3. Mismanaging Credit: I owe you, you owe me.
There are two ways to mismanage credit in small business:
- Granting credit without wise credit policies
- Using credit without any plan as to how to pay the bill.
4. Ignoring the relationship between receivables and payables.
If what a business owes to others is far more than what is owed to the business, then it has arrived at a critical problem. It’s not just the balance that’s important, it’s the quality as well. If a businesses’ receivables are as old as time itself then the chances that they will ever see actual cash are very slim indeed.
5. Focusing on profit instead of cash flow.
Profit is the ultimate goal of every business. Or is it? Many businesses that fail are operating at a profit? For the small business, cash flow is the ultimate goal. No cash flow. No business - end of story!
What’s the difference? Mostly the difference is in the decision making process. “If I take on this big job, it will earn me a huge profit, but if I take on five smaller jobs, I’ll have cash to pay my bills.” Every business wants to be profitable but every decision has to be measured against the effect it will have on cash flow.
6. Forgetting the basic debts.
Some bills are easy to forget. Bills like insurance, payroll taxes, superannuation. They sort of sit out there, almost off the radar screen. They don’t have to be paid right away. It’s easy to forget them until suddenly they’re due and they’re due right now. Then, cash flow problems result as businesses can rob Peter to pay Paul. It can take months or even years to recover.
7. Spending the company’s future on a speed boat.
Everybody is guilty at some point in their lives about fantasizing about a little luxury. Haven’t you always wanted a speed boat? Or a fancy car? Or an all expense paid trip to Europe? It might be tempting to try to pass your personal purchases off as tax deductible business expenses. But, it’s a bad idea for two reasons.
The people who work at the Australian Taxation Office (ATO) are over-worked but they’re not stupid. The last thing you need is an audit. An audit could reveal your transgressions and could result in an unexpected tax bill plus penalties and interest.
