Most individuals these days wish to own their businesses and enjoy an independent life. Everyone focuses on the benefits of running a business and neglects the challenges associated with the process. What many aspiring entrepreneurs fail to understand is the importance of tracking cash flow.
Do you know that about 9 of every 10 businesses fail because they face cash flow issues? A study carried out by D&B shows that 90% of small businesses shut down because of poor management of cash flow. What this implies is that with the wrong habits, your interesting idea could go down the drain.
If you don’t reach profitability in your first 18 months of operation, your business is at risk of bankruptcy. In this post, we will show you 5 cash flow draining habits that you must avoid.
5 Cash Flow Draining Startup Habits
Cash flow helps you to measure the monetary assets that come into and leave your business during a specific period. It reveals the current financial health of your business as it shows how much cash your business has. One thing you must know as a business owner is that your money moves determine whether your business survives or not.
Here are some cash flow draining habits that you must avoid if your business will stand the test of time:
1. Not tracking cash flow
How it drains cash flow: If you’re not staying on top of what comes in and out, you’re left to check the accounts to see where you stand. Even if you have enough cash on hand, will you next month/quarter?
There is no business venture, regardless of size, that doesn’t depend on cash. Cash inflows resulting from investments, sales, loans, etc. ensure that the business continues to run. It is also impossible for a business to run without outflows such as funding inventories, capital expenditures, payroll and operational expenses.
What this implies is that without inflow and outflow of cash, a business will cease to exist. However, your business must have positive cash flow if it will survive in the long run. Once your cash flow falls into the negative, you lose the ability to pay bills when due.
Tracking your cash flow ensures that you understand your upcoming expenses and can compare them against your accounts receivable. When you don’t track your cash flow, you cannot tell the current financial health of your business. As such, it is impossible to do any of the following:
- Budget efficiently
- Save for the future
- Avoid unplanned expenses
- File taxes early
- Make provision for inventory and investments
- Hire efficient talent
Cash provides your business with survival power. This is why you must develop the habit of tracking your cash flow.
2. Make late payments
How it drains cash flow: Late payments equal fees (in the near term) and damaged partnerships. Banking partners, material suppliers and other obligations can build into more favorable terms if you keep your commitments (and payment schedule).
Making late payments is one habit that you cannot afford to have. It hurts your business in several ways. A few of them include:
- Late payment charges
- Raised interests as part of the late payment penalty
- Poor credit score resulting from your terrible credit history
- Sour relationships with business partners and other stakeholders
In a nutshell, when you make payments later than they should, you end up eating into your cash reserves. This will affect your business in the long run as funds that should be used for growing the business are used to offset late payment penalties. In the end, the business falls into negative cash flow and is at risk of folding up.
Relationships and networking are very important to the survival of your business. Making late payments affects the relationships that you have with vendors and suppliers. The result of this is that when you need a favor in the future, you are likely not to get it. This is because you have fallen down the pecking order because of your reputation for late payments.
3. Fail to budget
How it drains cash flow: Budgeting sets the pace for spending. If no bumpers exist, your receipts could pile up, leaving you in a compromised position.
It is no secret that most business owners hit the ground running with amazing ideas, enthusiasm and optimism. What they fail to do is to create a well-constructed budget. While it is difficult to blame business owners in this regard because of their cumbersome daily routine, not budgeting has negative effects on businesses.
A budget helps you to identify how much capital is available, a clear estimate of your expenditure and what to expect in revenue. This makes it possible for your business to measure its performance against expenditure. Without a doubt, the basis for business success is budgeting as it helps with financial control and planning.
The question that begs an answer is, “What happens to your business when you fail to budget?”
Here are a few answers to this question:
- It becomes more difficult to achieve your financial goals
- Lack of savings
- Reduced financial control
- Overspending becomes unavoidable
- Increased chances of falling into debt
- Less financial contentment
- More stress
Do you now see why you cannot afford to fail to budget? When you have a well-constructed budget, it is easier to make financial decisions and meet your business objectives.
Some of the other benefits that you enjoy include:
- Restricts unplanned spending
- Easier understanding of business priorities
- Better planning
- Avoiding late payments
- Tracking of inflow and outflow of cash
- Better communication within the organization
4. No dedicated bookkeeping and accounting
How it drains cash flow: Founders and entrepreneurs often have great intentions to improve financial performance. But wearing multiple hats and growing a fast-paced startup leaves little time for details, at times. A dedicated accounting service gives you the reporting, allowing you to make fast, agile financial decisions.
It is almost impossible for a business to exist without efficient accounting operations. This is because accounting is among the most essential functions that a business needs to enjoy robust financial management.
Larger businesses can afford to employ specialized individuals to handle the best accounting and bookkeeping software on their behalf. While this is great, it is not sustainable for smaller businesses. This is why many smaller businesses prefer to outsource their bookkeeping and accounting processes.
Your business will end up failing without efficient bookkeeping and accounting services. Efficient accounting doesn’t just focus on keeping your financial records. It also ensures that your business enjoys proper planning, provides advisory services and facilitates financial operations.
Here are some benefits that your business will enjoy from outsourcing your accounting processes:
- Saves time and cost
- Fosters business growth
- Helps the business to stay compliant with the necessary regulations and requirements
- Maximizes savings and deductions
- Establishes an organized and automated accounting flow
More than anything else, a dedicated bookkeeping and accounting service allows you to focus on business growth. This way, you have more control over the productive side of your business and can make proactive decisions.
5. Falling behind on invoicing and collections
How it drains cash flow: Accounts receivable, late payments (by your clients) or card expirations (for SaaS businesses) add up. If you’re not on top of it, it’ll hit your accounts hard.
Invoicing and collections are tasks that most business owners regard as tedious and time-consuming. This is probably why most of them fall behind on invoicing and collections. However, if your business will maintain a positive cash flow, you cannot afford to fall behind on both.
Some of the common invoicing mistakes that businesses make include:
- Forgetting to invoice
- Procrastinating
- Failure to follow up on invoices
- Not having clear terms
- Sending invoices to the wrong recipient
- Missing out on details
- Failure to itemize
- Failing to backup invoices
Already, small businesses have challenges with late-paying clients. You cannot afford to fall into the mistakes above. There are several ways to overcome these mistakes and be on top of your invoicing game. The most common these days is making use of invoicing software. Subscribing to such solutions helps you to avoid falling behind on invoicing or collections.
Ready to Accurately Track Cash Flow?
So far, you have seen how important it is to track your business’ cash flow. We have shown you 5 habits that you must avoid if your business will maintain positive cash flow.
More than anything else, you need to subscribe to an accounting service that has a clear understanding of startups. A good place to begin is Pasquesi. If you have any questions, you can drop them in the comments section below.