Cash flow is a crucial element of success whether your business is just starting out or well-established. However, as a business owner, you may find it difficult to move toward positive cash flow while juggling the other management tasks on your plate.
Often, entrepreneurs and leaders make some critical errors in handling their cash flow, especially in the early stages. From having too many expenditures to neglecting taxes, there are a number of mistakes that can easily jeopardize the future of your business.
Below, a panel of Young Entrepreneur Council members shared nine common mistakes to avoid when managing your cash flow and how you can remedy them.
Being Reckless With Money
There is a fine line between confidence and reckless bravado. One potential impact on a company’s cash flows can stem from an entrepreneur’s early successes. On the heels of a great quarter or landing of a major customer, we have observed entrepreneurs who run headlong into an expansion of investment, such as aggressive new hiring or a new facility expense. The emotional pitfall of near-term success ignores a deeper exploration of what the outlook for the industry is and the company’s ability to scale or execute. Short-to-medium-term cash flow analysis and scenario planning are ignored, resulting in a scenario where an owner “gets ahead of their skis.” The added operating structure puts a drain on earnings and cash flow on future revenues—some or all of which may or may not ever manifest. – Daniel Lucas, Credo CFOs and CPAs / CVG Advisors
Not Having A Long-Term Outlook
Not having a long-term cash flow outlook is the number one common mistake that many of us make. If you do not have a good idea of past and current income and expenses, then you are likely to make this mistake. To rectify this, start with anticipating looming shortages of money before such a situation arises. Spending some time on planning and managing cash flow is important. – Baruch Labunski, Rank Secure
Ignoring Smaller Recurring Transactions
Omitting small recurring transactions can be detrimental as they add up over time. Signing up for numerous services and SaaS solutions, paying for office breakfasts occasionally or any cash expenses like Starbucks for your team on your way to work can add up quickly over time and impact your projections accordingly. While they don’t necessarily make a difference at first, these small yet ongoing expenses add up over time and have to be accounted for in your monthly projections and financial reports. It’s pretty common, especially for startups looking for on-and-off ways to motivate the team, celebrate small launches or engage with group activities. Monitor finances every quarter for lurking expenses that creep in. – Mario Peshev, DevriX
Failing To Make Financial Plans
Not engaging in financial planning through the use of budgets and cash flow projections is a major mistake. Lots of companies don’t do the work to plan for cash flow, especially when it comes to collecting debts from customers faster than paying suppliers. – Chimezie Emewulu, Seamfix Limited
Not Preparing For Economic Downturns Or Hardship
One mistake I see all the time when it comes to managing cash flow is not preparing for economic downturns. This has really been highlighted by the pandemic as many businesses have gone under. Businesses put their futures at risk by taking too much cash out of the business and not reinvesting it or establishing cash savings. This is the business equivalent of living paycheck to paycheck. One way to remedy this is to consult a financial advisor. Get them to help assess your business’s health by establishing what your risks are and how to mitigate them. They should be looking at everything from your assets and operating costs to your insurance and payroll. They will be able to make recommendations for changes that will help your business be robust and withstand times of financial hardship. – Maria Thimothy, OneIMS
Not Being Proactive About Accounts Receivable
It’s critical to proactively manage accounts receivable, like sending out invoices promptly in order to collect payments on time and always preparing for at least a portion of payments to come in late (because they inevitably will). It may be challenging in the early stages of a business—especially a service business—to hold reserves, which can cushion cash flow issues. Another approach is to try to identify and qualify for other forms of liquidity, including traditional loans and lines of credit before you need them. Getting access to a line of credit to absorb short-term cash flow shock—like a major client’s payment being a few weeks late—was one of the best decisions we ever made as a business. – Danielle Allen, Building Impact
Relying Too Much On Outside Funding
It’s common knowledge that the best way to ensure your business has a good future is to constantly reinvest your earnings into further growth. However, the Covid-19 lockdowns demonstrated how unsustainable this business model can be when unexpected crises occur. Although it’s nice when government assistance is available, this isn’t something a business should rely on in the future. Because of that, I recommend devoting at least a quarter of your profits to liquidity in the event that your business cash flow is interrupted unexpectedly in the future. – Bryce Welker, CPA Exam Guy
Not Considering Product Life Cycle
Entrepreneurs do not take into account the stage in the life cycle of their product or service and then confuse profitability with cash flow. For instance, in the initial phase, cash outflows significantly outweigh the inflows, but businesses often fail to address this on time, blinded by the projected profitability of their product or service. In fact, a balanced cash flow is far more important in the short term, and this misunderstanding is probably one of the main reasons why many businesses fail in the early stages of development. So, it is a timing issue rather than a question of profit or loss. – Bogdan Gecic, Gecic Law
Not Keeping Some Cash On Hand
Even if you have implemented lots of safeguards to protect your cash, snags inevitably happen. While this may be no big deal to companies that have cash on hand, if you have a zero account balance, one bad month leads to disaster. I always try to have an account balance equal to at least two months of operating expenses. This especially proved invaluable during Covid last year as we adapted to the rapidly changing market. Even when we had a pause in cash flow, we still had reserves to protect ourselves and our confidence. While keeping a reserve can be difficult, I have found that keeping unnecessary spending at bay, staying objective about business processes and communicating with each team about their needs helps with current and future business success. – Shu Saito, All Filters
This article was originally published on forbes.com.