In the world of business, cash is king. You can't survive if you don’t manage your cash flow.
According to the study released by Wakefield Research in September 2018, half of Australian small businesses surveyed have lost $10,000 or more by foregoing a project or sales due to cash flow issues.
To guide you on how you can effectively maintain a healthy cash flow, here are 5 risky cash flow mistakes that you should avoid.
1. Not tracking your cash flow
Cash flow is the lifeline of any business and it is imperative to track cash in and out on a regular basis so you can keep an eye on the balance between expenses and sales. If you continually overlooked your gaps, you’re probably leading your business in the wrong track.
Performing a daily cash flow management, reduce the risk of running out of sufficient fund for your business to operate, this can also help you avoid overspending and overtrading.
2. Spending recklessly
Every owner only wants what’s best for their business and some may think that spending a lot of money is needed to successfully run their business. But in reality, overspending on an impulse purchase without assessing its cost/benefit will only leave you sinking in a sea of debt.
Spending more than you can afford can negatively impact your cash flow. So, before you make a purchase, always consider the cost-benefit of every single expense to guarantee that you’re not pouring down your business’ money on drain.
3.Permitting late payments
Unpaid invoices from clients is one of the fastest cash flow killer. You’ll probably put your business in a critical cash flow situation if you’re not aggressive enough when it comes to collecting payments from your customers.
In order for you to ensure that you’re getting paid on time, set a clear policy and late-payment penalties beforehand. Also, make it a habit to send an invoice as soon as possible and update your clients a week before they’re due.
Offering an incentive for early payment can be a proactive way of minimizing late payment. Not only that, you can also improve cash flow and the availability of working capital.
4. Not keeping a cash cushion
Often times, cash cushion is being mistakenly thought as an emergency fund.This vast misconception leads a great impact to your cash position as those two funds serves a different purpose to your finances.
You can protect your business against insufficient-fund penalties and overdraft fees from unforeseen expenses by keeping in hand a cash cushion. This also serves as your baseline checking account balance.
Your cash cushion doesn’t have to be thousands of dollars. In fact, It is wise to keep a lower amount enough for you to cover irregular one-time expenses, so it would be easier for you to replenish as you use it. It will also refrain you from overusing your cushion.
But remember, every business is unique and has different needs, so better review and analyse your operational expenses and current financial situation to make sure that you’re keeping the right amount in your cushion.
5. Falling behind your taxes
Being late is not a good practice in any aspect of your business, especially if this involves your tax.
If you fail to meet your tax obligations on time you’ll have to pay for late penalties and fines and further complicate filing taxes at the end of the year.
Moreover, if you habitually fall behind your tax responsibilities for on an ongoing basis you’ll get yourself in trouble with the ATO. As well as jeopardising your cash flow, it may also put your business at stake for an audit.