The 7 Deadly Sins: The Worst Cash-Flow Mistakes Business Owners Make

Want to improve your business cash flow? Start by avoiding these 7 Deadly Sins.

1. Being a Bank.  I mention this every single time I talk about Cash Flow issues. You must be active and attack your Accounts Receivables. Never be passive. One of the worst cash-flow killers, especially for growing businesses, is lack of attention on AR, especially past-due AR. That can be slow paying customers. Or worse, uncollectible AR. Both are deadly to survival and will be a huge factor to cash flow issues. The fix: Make Collections a priority. Set boundaries with your customers with Due Dates and if they pass, hound them. Impose late fees and collect them. And, if they are super late, turn them over to collections. Don’t mess around. Set that boundary fast and early. Remember, you train others how to treat you. So, a company trains their customers how to pay them. Attack AR constantly. Remember, you’re in business to be a bank for your customers or clients.

2. Not Flashing the Cash. Look, Sales are good. Profits are great. But Operating Cash is King. Operating Cash is the free cash the business is generating. Always focus on that goal. So, monitor your cash flow status on a weekly basis. This means create a basic “Flash Report” for Cash. Have your accounting team prepare this for you. Don’t wait for the monthly close or bank reconciliation. And, don’t just look at Cash already generated. Make your Flash Report have Projections. So, forecast both incoming and outgoing cash on a weekly basis. I like to have the Flash Report for my clients project both Cash Receipts and Accounts Payables out for the next 2 weeks. That creates a “rolling” Cash Report. So, I know where Cash is in the moment AND I know where it is projected to be over the next 2 weeks. That allows me to push on AR or slower pay AP. I can also jump on the Sales team to generate more orders. Bottomline: Monitor Cash Weekly and Project Future Cash Position.

3. Not Saving For a Rainy Day. Business is about anticipation but you can’t always predict everything. So, for a business to thrive, it must plan to survive. Until a business reaches what I call “critical mass”, one huge mistake could put it out of business. That means losing a key customer, product, market, etc. could take you out. So, plan for the rainy day.  That means Cash Reserves are Critical. As you focus on generating Operating Cash, don’t put it all in your pocket or even back into the business. Put some into a savings fund. I like to recommend 10% of Net Operating Cash be dedicated to Cash Reserves. This will give you a cushion for the unexpected and help smooth out any unanticipated cash flow issues.

4. Not Invoicing Timely. Want to go out of business fast? Don’t invoice timely. Cash Flow starts with Invoicing. Be slow on that and you’re in trouble. So, when an order is shipped or a service delivered, invoice immediately. Set what I call Turnaround Times (TATs) on your AR or Billing staff to invoice within 12-24 hours, maximum.

5. Staying Manual or Stuck in the 20th Century. I call this not “cutting the paper”. If you want to go out of business quickly, stay manual in your cash receipts and accounts payable processes. That’s because manual methods are the slowest boat in the water. Instead, step into the 21st Century. Use electronic billing. Essentially, automate your AR and Cash Receipts cycles. Your cash receipts (cash, credit card, ach, etc.) can be deposited directly to your account and everyone saves on the cost of paper and stamps. More importantly, you take the human aspect out of manual cash receipts and remove human error rate. And, taking electronic payment helps your customers or clients. It’s fast, and customers are likely to respond more quickly when they can pay instantly. Quickbooks, Freshbooks and WePay are some online billing programs designed for small business owners. Larger, middle-market ERP and Accounting systems such as Intacct, Microsoft Dynamics or Sage have electronic billing and cash receipts built into their basic applications.

6. Over-projecting Sales. Balance is key in a growth business and that approach is most valuable in projections and budgeting. Optimism is a key trait of most successful entrepreneurs. It is typically that optimism that helped them take the plunge into starting their own business and that optimism is what fuels their perseverance to grow. But optimism can’t become so extreme it clouds judgement or objectivity. That’s why Sales Projections must be realistic. They can be lofty goals but still must be achievable. So, doubling or tripling sales in one year just doesn’t happen often once a company gets over $1-5 million in size as the infrastructure won’t be in place to even execute on that sales volume if it came through in the first place. That’s why it’s so important to have objective and realistic sales projections based on historical evidence and real numbers. By applying quantitative forecasting methods, you can use actual past sales data from your own business (or other businesses in your industry) as a basis for tracking trends and predicting future sales. This information, along with some objective intuition, will help you come up with more realistic future sales projections. Sales Projections and Budgeting can be especially difficult in your first few years of business because you don’t have past sales figures or as much experience to draw from. This is where working with a consultant, advisor or mentor from within your own industry could be extremely useful. A strong business consultant, advisor or mentor can use their own experience to help you project future sales and even offer historical sales figures from personal experience to help you predict upcoming sales volumes. No matter which method you select, make sure to base your future sales projections on objective numbers and sound judgment. Without it, you’ll be out of balance and possibly, out of business.

7. Overspending on SG&A Expenses in Start-Up Phase. Having seed money is great but it can also be dangerous. That’s because the tendency is to spend money on areas that don’t really matter or contribute to the business. In any phase, but especially the start-up or infant phase of a business, most of your resources need to be focused on product creation, marketing that product, selling that product and delivering that product. Period. Everything else is excess. Unfortunately, some business owners are like a newly drafted sports star: they go out and start spending their money on overhead and fixed costs. Those are the most dangerous: Fixed Overhead Costs —typically rent, payroll expense, IT, etc. Anything that fixes you for a period of time. The way to scale a business is by having SG&A Expenses being as “Variable” as possible. This is where Outsourcing and contractors comes in.  If you want your business to succeed, always focus on your bottom-line and that means constantly watching where you’re spending money. On top of watching, learn to actually create budgets. So, on top of proper Sales Projections, create operating Budgets. Then, both the Revenue and Expense budgeting will lead you to a P&L Forecast that is realistic and useable.



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