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Starting your own business isn’t easy. Sustaining it is even harder. While accurately managing cash flow is key to carrying your business through tumultuous financial times, it can get more difficult to track as your company grows. We’ve identified four common cash flow management mistakes even seasoned small businesses owners make — and, more importantly, how to correct them.
Playing Nice With Past-Due Clients
As your business develops, so do your relationships with your clients. But that shouldn’t cloud your judgment when it comes time to collect. Avoid being too lenient with clients. Not being aggressive enough when going after past-due invoices or extending credit to clients who don’t deserve it can cost you. Even if you don’t mean to “play nice,” a sloppy accounts receivable system might be doing that for you. Have a clear plan of action in place for collecting past-due payments — whether it’s instituting late fees or other financial penalties — and stick to it.
Lack of Savings
You already know you should have enough in your personal savings to financially survive for at least three months in case of emergency, so why should your small business be any different? An unexpected expense or a slow sales month could turn into a disaster if you’re not prepared. Experts generally recommend saving enough to cover anywhere from two to six months’ worth of operational expenses. That safety net could be the difference between a slow down and a shutdown for your business.
Treating Your Bank Account Like the Bottom Line
Another common cash flow management mistake is not seeing beyond your bank account balance. Just because you can write a check on a certain day doesn’t mean you should. When it comes to your business’ constant cycle of spending and payments, your bank balance is a superficial representation of what funds you truly have available. There are uncashed checks, pending payments and a myriad of other factors to consider. To really understand what you can spend, you’re going to need to track your day-to-day cash flow.
Failing to Keep a Cash-Flow Budget
One of the best things you can do for your business is to diligently keep a cash-flow budget. Having a firm grasp of the money coming in and out of your business will help you make educated decisions when it comes to big-picture expenses like inventory. Tracking the numbers on a consistent basis will help you identify downward or upward sales trends that could otherwise overwhelm you and ensure you have a firm grasp on your operating budget for the upcoming year. There are a lot of great tools out there to help you track your cash flow. Many business planning software programs come with cash flow management tools, as do some small business credit cards. Depending on how detailed you want your cash flow budget to be, you might also want to look into investing in a standalone cash flow management tool.
Even though it takes some time and effort, getting your cash flow management right will only set your business up for continued success.
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