Running a business can be a time-consuming occupation, and once all of the daily minutiae is under control it can leave little time to worry about managing cash flow properly, let alone optimising it.
The problem, however, is according to the latest figures, it is estimated that 90% of small businesses that fail, do so due to cash flow management issues, usually.
However, if you’re trying to grow your business then avoiding some of the more obvious cash flow traps is a must do.
Here’s our top 3 easy to avoid working capital mistakes:
Manage late payments and overdue amounts
One of the biggest problems SMEs have is late paying customers. It’s estimated that over half of Australia’s SMEs are currently owed more than $20,000 from active customers.
Most SMEs try and patch these gaps in cash flow by taking on extra debt in the form of loans, credit cards or bank overdrafts, which can exacerbate the problem, leading to an over-reliance on financing which can quickly leave them over-leveraged.
Whilst financing can sometimes be necessary, spending more time reminding customers of their obligations, penalising chronic late-payers and incentivising early payment should be given some consideration first.
Expect the unexpected
This should probably be amended to prepare for the unexpected. You will, over the course of your business life, encounter hurdles which no one will see coming, and from which you will ultimately end up losing money and business.
Any unexpected hit to sales is going to directly impact your growth and your cash flow.
There is almost no way to prevent these kinds of things from happening, and that’s not what you should be trying to prepare for. The goal is to minimise the damage done and rectify the situation with as little disruption as possible.
Having a contingency funding plan ready to go will help you to manage the drop in cash flow.
Watch out for hidden costs
There are some costs that, whilst they may seem small and insignificant at first, add up to put a major dent in your cash flow.
These can be things like insurance coverage, credit card debts and bank fees, permits and licencing, legal fees, changes to employee benefits, new legislation, or a whole host of other things. While these can all be relatively small costs, if not kept on top of they can have a serious impact on your business cash flow.
Proper financial planning and consistent management is key to not just growth but keeping your business open. While many SME owners find they do not have the time to properly manage their cash flow, it is the most crucial part of running a business.
Keeping on top of costs and managing your debtors is a vital part of succeeding and helping you to avoid becoming overly reliant on finance to manage your business.
Talking to an accountant or licenced, experienced financial planner can often be the best course of action for those whose focus is more on doing what they love than focussing on the numbers.