It doesn’t really matter how great your business model is, how profitable your business is, or how many investors are supporting your business, you won’t be able to survive if you can’t manage the cash flow of your company. Research indicates that 85% of startups fail because they are unable to manage their cash flow, which is why it should set alarm bells ringing in your mind if your company is struggling to manage its cash flow.
If you’re breaking out in cold sweats right now and want to know how you can manage your company’s cash-flow, you should make sure that you can check out the most common cash-flow problems:
Overestimating future sales volumes
Successful entrepreneurs are always optimistic, which is their biggest asset. However, even though being optimistic is important for a business owner, taking stock of your cash-flow and managing it properly is absolutely critical. That is why you should make sure that you can remain completely objective and set realistic-sales forecasting that is based on real numbers and historical evidence. By using the right forecasting methods, you will be able to track trends and therefore predict future sales with greater accuracy.
Revenue forecasting is not the easiest thing to do, especially during the first few years, which is why you should work with an experienced cash-flow manager or forecaster during the initial stages.
Engaging in impulse spending during the startup phase
There is a saying in business ‘It takes money to make money’, and it is definitely true. The common entrepreneur has been known to give in to their impulses and overspend during the first few months of their business. While it does take money to make money, you should realize exactly what type of costs your business can actually handle.
If you want to ensure that your business makes money, you need to consider the costs of the overall expense that your business is incurring. Every single dollar that you spend on your business is another dollar that is making your profit margin move further away from you. So make sure that during the startup phase, you aren’t spending a whole lot of money, since it can come back to haunt you.
Being passive about past-due receivables
This is a major error that is made by businesses today, and it is a direct result of unpaid invoices from clients. If you’re not proactive to collect payments from clients, you’ll be on the wrong end of a cash flow situation. Most businesses struggle to achieve this during the initial stages and that is why they end up going out of business eventually. So make sure that you set up good and stringent policies that are going to allow you to collect payments from your customers on time.
Not using a cash-flow budget
This is another major error that a lot of startups make in their initial stages, not setting up a cash-flow budget. You need to track your company’s day-to-day cash flow, since it will allow you to know exactly how much money you are spending and how much is going in the bank. It is imperative that you use a cash-flow statement, which will allow you to track your revenue and all expenses during a specific time period. You can then also anticipate future expenditure and guess how much money the company is going to make in a financial year.
Not keeping a cushion on hand
It doesn’t matter how many different measures you use to protect your company’s cash, there will come times when you will be faced with numerous business problems. At such moments in time, it helps if you have got a cushion of savings on hang, since it can mean that you ride out the rough times without suffering severe damages. That means that you have to expect unexpected periods of instability, where you may require the help of extra cash in reserve to protect yourself.
Managing cash-flow issues are definitely not easy, and it is one of the hardest challenges that you will face as an entrepreneur. However, if your main objective is to ensure that you avoid suffering the same fate as about 85% of startups, then you have to make sure that you don’t make any cash-flow mistakes.