Cash flow is the lifeblood of any business, yet so many business owners find themselves constantly struggling to keep money in the bank. The problem isn’t always a lack of income—it’s often poor cash flow management. If your business is always running on empty, it’s time to take control. Below, we’ll cover common cash flow mistakes and how to utilise your bookkeeping to better forecast and rectify your cash flow.
Common Cash Flow Mistakes (and How to Avoid Them)
- Not Tracking Expenses Closely
Many businesses focus on sales but neglect to monitor spending. Unchecked expenses can quickly drain your cash reserves. To avoid this, regularly review your financial statements and set clear spending limits. - Slow Invoicing and Late Payments
If you’re not invoicing promptly, you’re delaying your cash flow. Even worse, if customers are paying late, it puts extra strain on your business. Utilise your bookkeeper better by talking to them about invoicing strategies; you might be surprised what they can suggest. Be sure to follow up on overdue payments consistently. - No Cash Flow Buffer
Unexpected costs can arise at any time, and without a financial cushion, they can throw your business into crisis mode. Aim to set aside at least a few months’ worth of expenses as a buffer. - Relying Too Heavily on Credit
While business loans and credit cards can help in tight spots, over-reliance on borrowed money can lead to high interest costs and unsustainable debt. Be mindful of how much you’re borrowing and focus on improving your cash flow instead. An experienced bookkeeper can help you to better understand and use your cash flow to avoid the need for other debts. - Ignoring Seasonal Trends
Failing to plan for revenue fluctuations throughout the year can leave you with insufficient funds during times you need it most. Your bookkeeper can analyse past financial data and help you budget and to adjust spending accordingly.
How to Set up a Simple Forecasting System
It’s important to setup a cash flow forecast to ensure you can meet future expenses. Doing this will allow you to plan and prevent unexpected shortfalls. Here’s how to get started:
- List all of Your Expected Income
Account for all income (including sales, subscriptions, other reoccurring payments and pending invoices). - List all Fixed and Variable Expenses
Keep track of all expenses, whether they are fixed or variable (which could include, but not limited to, rent, wages, utilities, inventory, and any debt repayments). - Forecast Weekly or Monthly
Chose a weekly or monthly routine to deduct all your expenses from your income to determine your financial position. If you notice potential shortfalls, take action early to reduce the risk of having low cash. - Use Your Bookkeeper
A professional bookkeeper uses efficient tools to streamline processes and provide real-time financial insights, making the process much easier for you. By using projections from history, as an example, your bookkeeper should be able to get a clearer picture of your cash flow for the future.
Strategies for Staying Ahead of Unexpected Expenses
- Build an Emergency Fund
Just like personal finances, businesses should have an emergency fund to cover unexpected costs. Rather than operate on a razor’s edge financially year after year, resist the urge to expand too quickly. By dedicating time to creating a financial buffer for your business, you can eliminate a great deal of stress into the future. An experienced bookkeeper may be able to create a budget to help you build this buffer without tying your hands too tightly financially. - Negotiate Longer Payment Terms
Collaborate with suppliers to lengthen payment deadlines and simultaneously encourage clients to pay their invoices faster. This can ease cash flow problems. - Explore Multiple Income Sources
It’s risky to rely on only one income source. Consider new products, services, and client groups to improve stability. - Regularly Monitor and Adjust
You’ll need more than just a one-time cash flow. To avoid potential problems, have your bookkeeper regularly review and update your financial forecast to stay ahead.
Managing your cash flow effectively reduces stress, improves financial stability, and ensures long-term business success. Your bookkeeper can provide cash flow forecasting, management, and guidance for your business going forward.
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