The biggest causes of cash flow problems for business owners
Many entrepreneurs are not particularly financially savvy. Unfortunately, this is one of the biggest reasons that businesses fail.
According to a study by US Bank, 82 percent of all business failures are attributed to cash flow management errors.
If you want to ensure the longevity of your business, you need to make good financial decisions. You must be aware of the most common financial mistakes and avoid them at all costs. Here are some of the most common financial mistakes to be aware of.
Neglecting to create a cash reserve for recurring costs
Many consumers live paycheck to paycheck. Although this is partly due to stagnant wages, a lot of the problems stem from bad financial habits people make. As a business owner, you can’t afford to bring that mindset into your professional life.
Your revenue is not going to be nearly as dependable as it would if you had a regular job. If you barely have enough money to cover your monthly expenses, then one late payment from a customer could cause your checks to start bouncing.
This means that you can’t be too liberal with your spending when times are good. You need to build a cash reserve to whether the periods of austerity.
Setting unrealistic expectations about your future of revenue
Every business owner wants to believe that they will be a millionaire within the next year. Unfortunately, the future will seldom resemble what we see through our rose-tinted glasses.
Your future sales are probably going to be lower than what you would like. You need to make sure that you are basing cash flow projections off of empirical data, rather than wishful thinking. You also need to adjust your predictions for seasonal and market forces.
Of course, even if you carefully make your financial projections, you can’t account for variance. There are always going to be factors outside your control, which means that there is a strong possibility that sales will be lower than what you expect. If you are basing all of your purchasing decisions off of the assumption that you will spend every dollar you expect in sales, you could be between a rock and a hard place if they come up short. Always give yourself some wiggle room. It is a good idea to avoid spending more than 80 percent of what you expect to generate in sales, although this figure is going to vary by industry.
Not being assertive about collecting accounts receivable
I once had a client that was six months late paying a $1,000 invoice. This created some serious financial stress in my life.
Fortunately, this problem only happened once in the nearly 10 years that I have been self-employed. A lot of other business owners are not so lucky. They regularly have clients that don’t pay what they are required to. When you have multiple clients that are a month or two late paying their invoices, you are going to run into some serious problems. This is a major reason that business is run into serious financial problems.
Nobody wants to be hassling their customers to pay invoices. However, sometimes it is necessary. Remind yourself that they are the ones that are at fault if they didn’t pay on time.
Investing in too much new capital before you have the revenue to justify it
One of the biggest mistakes that businesses make is trying to grow too soon. You need to be careful not to get too ahead of yourself. You will eventually need to buy new capital to grow your business. However, you need to make sure that you are building a cash reserve in the meantime to cover your regular costs and prepare for future downturns. This is especially important if you are in a highly cyclical industry.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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