7 Common Cashflow Pitfalls (and how to avoid them!)
It goes without saying that cashflow is fundamental to SMEs – yet poor cashflow management is a common problem that can push a small business over the edge and into the danger zone. As the owner of a small business, it can sometimes seem easier to put your head in the sand and try to ignore cashflow issues that arise – but this only worsens the problem.
It is much more sensible to acknowledge your cashflow problems and build a strategy for tackling each one head-on. In this article, we’ll talk about some of the most common pitfalls for SMBs when it comes to cash flow management.
What is cash flow?
Cash flow refers to the movement of all money coming in and out of your business. It’s not about the amount of sales you make, or the amount of revenue your business sees, but instead it’s the actual cash that is available within your business.
While cash flow is important for all businesses, it holds a critical place for SMEs. Here are 7 of the most common cashflow pitfalls – and how to avoid them.
Late Payments
£4.4 billion. That is the amount UK SMEs spend chasing late payments every single year.
Late payments are one of the top causes of cash flow problems for businesses.
Continuously checking payments, putting the time aside to chase clients, and updating records is timely costly. To relieve yourself of this manual task, it is worth thinking about ways of making payment easier for customers, by offering mobile and digital payments, or options like cash on delivery.
For businesses that require face-to-face payments, services like Square allow you to take card payments anywhere, via a portable, battery-powered card reader. Online, the world is your oyster. Worldpay processes over 40% of all card transactions in the UK, but options like Paypal, Shopify, Stripe, and Klarna are all great too.
If none of the above options are suitable and you still find yourself continuously chasing, it might be best to put in place some automated reminders for clients instead. Finance automation systems might seem costly but in the long term save you time, money and stress.
If you’re really struggling to get a client to pay up, there are also debt collection agencies. This isn’t as scary as it sounds, and many simply send letters and make calls on your behalf. The downside is that it is expensive and in regaining your cash, you could be saying goodbye to future business.
Late Invoicing
Sometimes admin is the last thing you want to think about in a busy business. But speeding things up at your end can pay dividends for your cash flow.
One easy way to do this is through invoicing software like FreshBooks, Intuit Quickbooks, and Zoho Invoice. The price of these services varies, but when you can use a mobile app to pull together an invoice on the go, some might say they’re invaluable.
Overinvestment
Even if you’ve had a recent injection of funds, try not to spend too much on non-essentials like fancy equipment and office furniture – especially if you do not have much of a cash buffer. Overinvesting in unnecessary items is a quick way to let the cash that did come in quickly disappear.
We’d recommend keeping a list of ‘Must Haves’ and ‘Nice to Haves’ and focus on the former. Consider hire purchase agreements or buying second-hand to save costs. Or, even better, plan ahead!
Overstocking
Sometimes, it can be tempting to stock up on product and raw materials ‘just in case’. But when you’ve got a large inventory, the costs of storing it can mount up quickly.
You could try things like more regular stock takes, or only reordering when inventory reaches a minimum level. Alternatively, plan ahead by matching up your inventory management to your projected sales.
As always, investing your time in good financial planning could save you money in the long run.
Unexpected expenses
In business, you never know what’s around the corner: from flooded warehouses to broken machinery, to a sickness bug wiping out half your staff for a week.
However, while many things can be insured, unexpected expenses can still wipe out your business bank account while you’re waiting for your payout.
So what’s the solution? Well, in our experience, it’s a three-pronged approach: good risk management, strong financial planning, and having the right reserves in place to cover any nasty surprises.
Or, in other words: expecting the unexpected.
Expensive overheads
If you wanted to cut costs in your household budget, the first thing you’d look at would be rent, utilities, and phone/internet bills.
The same applies to your business overheads, so make sure you keep an eye on them and switch providers regularly if needed.
Another option is to avoid signing up for expensive overheads in the first place.
With strong cash flow forecasting in place, you’d have a better idea of your business’s budget, and be able to make savvier choices.
And finally, poor financial planning
Many of the cash flow pitfalls on this list could have been prevented with better financial planning.
That’s why every business owner should have a strong grasp of the cash going in and out of their business before they make any decisions involving money.
Outsourcing Cash Flow Management
For small businesses especially, we know that cash flow management can take up a huge bulk of already limited time.
By outsourcing cash flow forecasting and management to The Finance People, we can help reduce the time spent keeping track of money, and ensure your business is in a good place for the future. Our team of cash flow management consultants are experts; meaning you can put your finances in the safest of hands, while you take time to focus on the bigger picture. Get in touch today to find out more.
This article is part of our Ultimate Guide to Cash Flow Management series. To read the full whitepaper, click here.