Top Cash Management Mistakes
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Not Knowing Your Cash Flow Situation
As a small business owner, you should always be familiar with the present state of your cash flow. Review your cash-in and cash-out weekly to stay on track. Just because you have a positive balance in your [permalink id=”98″]business checking account[/permalink] doesn’t mean you have cash available.
Know when your customers are supposed to pay and when your bills and other expenses are due. Planning ahead and staying in the loop will help you make sure that everything is covered and there are no surprises.
Making Payment Errors
Businesses frequently make small payment errors. If you’re not careful, it’s easy to pay the wrong amount to the wrong account or to pay the same bill twice. Simple errors like this happen often and can be a huge headache when it comes to cash flow. Keep up-to-date, thorough records. If you do find an error, contact your vendor as soon as possible to take care of the problem.
Getting Behind on Your Collections
Making sure your [permalink id=”148″]customers pay on time[/permalink] is extremely important. Start by having a clear payment policy in place. Communicate your policy to all customers so that they are aware of the consequences involved in late payments. If a payment is late, stick to your policy.
If you send invoices late, your clients are more likely to pay late. Invoices should be sent to clients as soon as products are sold or services are completed. Be diligent about following up with your customers for payment.
Paying Bills Early
Avoid the temptation to pay your bills early. Why reduce your cash on hand before you have to? What if something unexpected comes up? If a vender offers a discount for early payment, then it may be worth considering, but you will still have to make sure the discount is worth giving up your liquidity.
Paying Bills Late
You don’t want to pay your bills early, but you definitely don’t want to be late, either. Late payments lower your credit score and harm your vendor relationships. In addition, late fees can add up quickly.
Don’t Take Clients on Credit Without Checking Their Backgrounds
Before offering credit to new clients, check their credit and ask for trade and bank references. A quick call will help you determine whether or not they have had any trouble paying their bills in the past. If their credit or payment history is poor, either don’t offer them credit or outline very specific payment terms and penalties for not paying on time.
Poorly Managing Your Inventory
You can usually receive discounts for buying in bulk from vendors or warehouse stores, but it’s not worth it if it means you’re going to have a warehouse full of supplies and unsold items. Does buying and storing 100 bottles of window cleaner at a time really makes sense? You won’t need to buy window cleaner for a few years, but if you manage your inventory poorly, you might not have any windows to clean. The same goes for inventory. While it may increase your margin when you buy larger quantities, it won’t do you any good if you don’t sell them.
Using Business Cash for Personal Expenses
It’s always a bad idea to use cash from your [permalink id=”96″]small business[/permalink] to pay for personal expenses, especially in the early days when cash can be scarce. Keep your personal and business expenses separate. Do you want to try to explain to your staff that you can’t pay the company’s bills because you and your family used company money to go on a nice vacation?
Focusing on Profit Instead of Cash Flow
When people think of a successful business, the first thing that usually comes to mind is profit. For a small business, profit is not nearly as important as [permalink id=”1284″]cash flow[/permalink]. At some point, you may need to choose between taking on one new contract with a client that will lead to a large profit and taking on a variety of smaller jobs with less profit. In many cases, the smaller jobs might actually be the better option.
By diversifying your clients, you are increasing the likelihood that you are going to be paid regularly. If you take on a single large client and it can’t pay on time, you may not have enough to pay your vendors. This could create all sorts of problems. Remember, not all customers are good customers.
Forgetting to Save
It may be cliché, but you should always pay yourself first. Establishing an [permalink id=”478″]emergency cash fund[/permalink] is very important and should be a priority for your business. If you pay all of your bills first and then see what’s left over, you’ll never get where you want to be. Think of your emergency fund like a bill, and make sure you always pay it. If you can establish a strong cash reserve for your business, you will be prepared in the event that you have a down month and need some extra money to pay the bills.
If you’d like to learn more about [permalink id=”1284″]cash management for your business[/permalink], or if you have any questions not covered by the above article, come in and talk to a cash management specialist at a [permalink id=”FB_NAV_LINK_LOCATIONS”]branch[/permalink] near you.
