7 Crucial Cash Flow Mistakes To Avoid as an Entrepreneur
In this guest article, we welcome Financial Coach Shishir Khadka to the blog to share some insights into cash flow mistakes he’s learnt to avoid from working with entrepreneurs and business owners.
As Eleanor Roosevelt once said: “Learn from the mistakes of others. You can’t live long enough to make them all yourself”.
I believe we can all take a cue from this and learn from the cash flow mistakes of other entrepreneurs.
A U.S. Bank study cited on SCORE discovered that 82% of the time, poor business cash flow management or poor understanding of cash flow contributes to the failure of a small business. If you don’t want to be among the 82%, then it’s time to learn from others’ mistakes.
As an entrepreneur myself, I wanted to share seven such crucial cash flow mistakes today that can take a business down – and how to avoid them.
7 ways to avoid cash flow problems
Mistake 1 – Not Being Accountable for Your Cash Flow
Many people think that all you have to do to build a successful business is to sell more. However, this does not guarantee cash will stay in your business.
It’s not about getting rich; it’s about staying rich in the business. Keeping cash in your business is something you learn as part of managing your cash flow. It takes time and effort.
The starting point of managing cash flow is not to leave this responsibility to your accountant. Your accountant can record transactions, but they can’t protect cash flow for you.
You can outsource the task to prepare a cash flow report for you, but you cannot outsource the responsibility to manage cash flow – because ultimately, it’s your cash flow. It’s your responsibility to become a financially savvy entrepreneur and be accountable for your cash flow.
Author and businessman, Robert Kiyosaki said: “The word accounting comes from word accountability. If you are going to be rich, you need to be accountable for your money”.
Mistake 2 | Not Leading With Your Profitable Products
What happens when you make lots of sales and still end up with less cash than you expect every single month?
It’s not unusual to find busy entrepreneurs who work hard every day and don’t have much cash to show for all this effort at month-end. These entrepreneurs often make the mistake of not knowing or not pushing their most profitable products. It’s no good if you go out there, work long hours and put all this energy into your business without any significant return.
You can change it by focusing on your profitable products and drop the ones that get you revenue but no profits.
Mistake 3 | Running Business Based on Your Bank Balance Without Having a System and Process To Monitor Cash Flow
“(Not monitoring cash flow) is like driving a car without scanning traffic on all sides. That’s how you crash your car. Such an approach in business can crash the company.” Shishir Khadka, Financial Coach
Many entrepreneurs make crucial financial decisions based on their bank balance. If you are one of them, stop doing that.
It is like driving a car without scanning traffic on all sides. That’s how you crash your car. Such an approach in business can crash the company.
The right approach is to use a cash flow statement to take a helicopter view of your cash position. If you are starting, then a simple spreadsheet to prepare a cash flow statement will work for you. But as you grow, move away from spreadsheets because spreadsheets are prone to errors, due to having to input data manually. You could avoid this by investing in cash flow software, like Float.
Software such as Float does the heavy lifting for you to prepare a cash flow statement report. Not only will it save time to prepare your cash flow forecast, but it will also produce a highly accurate cash flow report.
Most entrepreneurs want to have a system for efficiency, and I believe you should also have a plan for accuracy. Saving time to do a particular task is excellent. However, if the financial data which transforms into financial information you’ll use to make business decisions isn’t accurate, then it’s pointless. Accuracy is more important than efficiency. The best part about using software is that you can achieve both the accuracy and efficiency of having cash flow information at your fingertips.
Mistake 4 | Spending Money You Don’t Have
Emotions are a powerful force. They can help you sell stuff. But they also get people to buy stuff they don’t need with money they don’t have.
Before you make purchases in your business, ask yourself: “Will this purchase help me grow my business, or is it an investment in my growth?”.
If the answer is yes, then invest. If not, think twice before you spend your cash.
Remember, cash is the energy and fuel in your business, so use it wisely.
Mistake 5 | Not Having a Cash Cushion
A lack of cash flow cushion kills more businesses than one can imagine. Having this buffer is vital because it can help you to deal with an unprecedented crisis, economic downturn, or in times when your biggest customers leave you or your sales decrease. And by asking yourself, “Do I have enough cash right now to cover overhead expenses for the next 12 weeks?” you’ll stay clear of a business survival crisis. By all means, invest in growth, but don’t invest at the cost of survival. Do it after building a cash flow cushion.
You can use Float to prepare a cash flow forecast to get an idea of how much of a cash flow cushion you need to cover fixed expenses and tax liabilities for the next 3-6 months.
Mistake 6 | Not Getting Ready for Funding When Times Are Good
The best time to raise funding or get an overdraft facility is when you don’t need it. Why? Because an investor or a bank will tend to deny funding when they are in doubt about the business owner’s ability to pay it back.
To secure funding, you need strong financials. You also need to be financially savvy to communicate the value of your business. Learn to read a cash flow statement, make cash flow projections, and communicate your cash flow position to investors. Alternatively, you could get a coach or expert to work with you to communicate your cash flow position and projections, someone who can tell investors with confidence how much funding is required to grow the business and when they will be able to repay.
Don’t postpone this because you never know when you will need additional funds to keep your business alive.
Mistake 7 | Forgetting About Tax Payments
Entrepreneurs often forget to set aside cash for paying taxes. Then, when the tax deadline approaches, their business doesn’t have enough money to pay. In such a situation, if a business pays the taxes, then it has nothing left for day-to-day operations and the personal survival of business owners.
One of my clients made this mistake. He thought he would continue to make more sales and have future cash to pay tax. He didn’t set aside money to pay for taxes. When the new sales didn’t happen, he had a severe cash-flow problem.
To fix this, you have a couple of options. You can set aside a certain percentage of cash every week/month to pay for taxes in a separate bank account. Or, if you are not keeping aside a certain percentage of cash inflow, make sure to cover your tax outgoings in your cash flow forecast. Apps like Float can help you project your cash flow balance and help you see what it would look like when cash outflow for tax purposes is covered.
By avoiding these crucial cash flow mistakes, you will prevent cash flow problems and survive and thrive during challenging times.
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