An out-dated way of looking at the success of a business – any business – is to say: ‘let’s track the success of sales’. That might mean literally looking at sales department figures, or, for many businesses that deal in contracts (like construction companies, caterers, landscaping companies, etc.) it might even just be a feeling that sales are doing well.
But sales are only a part of the equation. Ultimately, sales aren’t the sole factor keeping a business afloat. The money being transferred in and out of the business – called cash flow – is a much more reliable metric for the success of a business. Managing it, and staying “cash flow positive” is what will ultimately keep the lights on.
Your business may be inadvertently making cash flow mistakes. Finances are complex and difficult, and so it should come as no shock that many small businesses are in the same boat. Luckily, acknowledging those mistakes, and working to rectify them will result in stronger cash flow. And, as established, stronger cash flow equals a healthier business.
They Buy Everything They Need
File this one under “Having unnecessary expenses”. Not only do you need to be able to justify every expense, but you need to investigate whether those items of expense cannot be attained by other, less expensive means.
Case in point: leasing vs buying a commercial vehicle for your business. A lot of businesses purchase their commercial vehicles and equipment, believing that it’s the best/only way to go about it.
Leasing, however, is the better option for businesses. Leasing a commercial vehicle doesn’t require you to put up a sizeable down payment (a notorious cash flow throttle), and the monthly lease payments are far lower than purchase finance payments. You can easily integrate a lease payment into your monthly expenses; car purchases are a little more difficult.
They Have No Accounts Receivable Strategy
Your business needs a strategy for staying on top of accounts receivable. There have been countless incidences of a business doing their responsible financial duties, staying on top of accounts payable, only to see a lack of funds coming in the other end.
Work a clear payable date into all your contracts. Incentivize early payment, and, if necessary, punish late payments (although, depending on who you ask, this isn’t a tenable long-term strategy, considering you actually want to keep your clients). Try to accept a number of forms of payments, just to remove the “payment barrier” for clients, and use an accounting software to stay on top of everything.
They Have No “Rainy Day” Emergency Fund
Simply put, there will be good time and bad times. The worst cash flow error you can make is assuming, during the good times, that there will never be bad times. Set up an emergency fund and squirrel a little money away each month. It might scratch at your cash flow in the short term, but it will save it in the long run.
Those are the big three mistakes that companies make. They aren’t the only three (you’ll want to look into credit, seasonality and taxes as well if you want to fully tackle cash flow negativity) but they constitute the biggest and most widespread areas for improvement.
